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https://www.courtlistener.com/api/rest/v3/opinions/4620799/	Joe E. Mellen and Lila Mellen v. Commissioner.Mellen v. CommissionerDocket No. 2921-66United States Tax CourtT.C. Memo 1968-94; 1968 Tax Ct. Memo LEXIS 204; 27 T.C.M. 433; T.C.M. (RIA) 68094; May 22, 1968. Filed William R. Bagby, for the petitioners. W. Gerald Thornton, for the respondent. FAYMemorandum Findings of Fact and Opinion FAY, Judge: Respondent determined a deficiency in the Federal income tax of petitioners for the calendar year 1961 in the amount of $2,081.74. The sole issue for determination is whether petitioners are entitled to a deduction for a nonbusiness bad debt in the amount of $9,800. Findings of Fact Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is hereby incorporated by this reference. Joe E. Mellen (hereinafter referred to as Joe) 1968 Tax Ct. Memo LEXIS 204">205 and Lila Mellen, were at the time material hereto husband and wife. The pleadings reveal that at the time of the filing of the petition herein, Joe's legal residence was at Lexington, Kentucky, and Lila Mellen's legal residence was at Plainfield, Indiana. They filed a joint Federal income tax return for the calendar year 1961 with the district director of internal revenue at Louisville, Kentucky. During the calendar year 1961, Joe was married to Lila Mellen, and Jean Hisgen (hereinafter referred to as Jean) was married to Doris Hisgen. Lila Mellen and Doris Hisgen are sisters. Early in 1961, Jean lost his job with the State of Kentucky. At that time he was 39 years of age, in good health, married, and had two children. Joe, in order to assist Jean, agreed to aid him in establishing an Avis Rent-A-Car business in Owensboro, Kentucky. At that time Joe operated a successful Hertz Rent-A-Car business in Lexington, Kentucky. To effectuate this purpose Joe drew checks on the Citizens 434 Union National Bank and Trust Co. in Lexington, payable to Jean, as follows: DateAmountMarch 15, 1961$5,000April 3, 1961500April 25, 19612,800April 27, 19611,000June 23, 1961200July 11, 1961 300Total$9,8001968 Tax Ct. Memo LEXIS 204">206 A few days after the date of the final check, Jean and Doris Hisgen executed an unsecured promissory note in the face amount of $9,800 payable to Joe and Lila Mellen. The note was back-dated to March 15, 1961, the date of the first check, and was due on March 15, 1962, with interest at 5 percent. Sometime after March 15, 1961, and presumably prior to June 23, 1961, Jean organized Hisgen, Inc., for the purpose of running a Texaco service station and an Avis Rent-A-Car business. Jean owned all but one share of the outstanding stock of the corporation. The corporation was primarily financed by the monies loaned by Joe. In addition to the money borrowed from Joe, Jean also borrowed $1,000 each from Bernard Young and John Bird. Part of the monies was utilized for downpayments on two automobiles, two trucks with van bodies, and to acquire the Avis franchise. Jean financed the balance of the cost of his rolling stock by loans from the Owensboro National Bank secured by mortgages on the vehicles. In addition to these vehicles, Jean's personal automobile was at the disposal of the business. Finally, the lot and station thereon were leased from Texaco. The venture proved to be a failure. 1968 Tax Ct. Memo LEXIS 204">207 By December of 1961 Jean was in arrears on the payments on the vehicles. He was also considerably in arrears on the mortgage payments on his home. From January to March of 1962, the various vehicles were sold in order to satisfy their respective mortgages. None of the debts owed by Jean, namely those owed to Joe, Bernard Young, and John Bird, have ever been repaid. Likewise, no interest has ever been paid on the debt owed to Joe. When the loans were made by Joe to him, Jean was solvent. He had assets and liabilities on March 15, 1961, as follows: Assets:Equity in house and lot$ 850.00Automobile, 1959 Buick1,733.33Automobile, 1955 Chevrolet900.00Furniture and fixtures 1,200.00Total$4,683.33Liabilities:Notes - Bernard Young$1,000.00John Bird1,000.00Loan payable to Milton Yonker300.00Automobile loan 500.00Total$2,800.00During the period March 15, 1961, through July 11, 1961, as noted above, Jean received a loan in the sum of $9,800 from Joe, and conversely acquired a liability for that amount. By December 31, 1961, Jean was insolvent. The stock he held in Hisgen, Inc., was worthless. His total assets were far less than1968 Tax Ct. Memo LEXIS 204">208 his total liabilities. He had also fallen considerably behind on his home mortgage payments, and the house was sold in early 1962. Throughout 1961 Joe was aware of Jean's financial condition. He has remained aware of that condition since 1961. On advice of counsel that it would be to no avail, Joe has never pressed Jean for repayment of the loan. He considered such to be impractical due to Jean's continuing insolvency. Jean is presently employed as a painter earning approximately $2 per hour and is still insolvent. At the time of the original loans both Joe and Jean fully expected the money to be repaid. On their return for the calendar year 1961, petitioners claimed a nonbusiness bad debt deduction in the amount of $9,800. Respondent in his statutory notice of deficiency has disallowed the deduction. Ultimate Finding of Fact A vaild debt existed between Jean and the petitioners, and such debt became worthless in the taxable year 1961. Opinion The sole issue for determination is whether petitioners are entitled to a deduction for a nonbusiness bad debt in the amount of $9,800. Respondent contends that petitioners have failed to establish that a debtor-creditor relationship1968 Tax Ct. Memo LEXIS 204">209 ever existed between them and Jean. He also contends, assuming arguendo that a debt did exist, that petitioners have failed to prove that the debt became worthless during the taxable year 1961. 435 We think that on the basis of the record before us petitioners have met their burden on both points. We, therefore, conclude that they are entitled to a nonbusiness bad debt deduction in the amount of $9,800. Section 166(d)(1)(B), Internal Revenue Code of 1954, provides that in the case of a taxpayer other than a corporation: (B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the taxable year, of a capital asset held for not more than 6 months. The regulations thereunder provide as follows: Sec. 1.166-1(c). Bona fide debt required. Only a bona fide debt qualifies for purposes of section 166. A bona fide debt is a debt which arises from a debtor-creditor relationship1968 Tax Ct. Memo LEXIS 204">210 based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. A gift or contribution to capital shall not be considered a debt for purposes of section 166. The fact that a bad debt is not due at the time of deduction shall not of itself prevent its allowance under section 166. Sec. 1.166-2(a). General rule. In determining whether a debt is worthless in whole or in part the district director will consider all pertinent evidence, including the value of the collateral, if any, securing the debt and the financial condition of the debtor. (b) Legal action not required. Where the surrounding circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient evidence of the worthlessness of the debt for purposes of the deduction under section 166. In order for petitioners to prevail, the evidence must clearly demonstrate that it was the intent of the parties to establish a debt in fact, that is to1968 Tax Ct. Memo LEXIS 204">211 create the debtor-creditor relation. In the cases of intra-family transfer of money, the transactions are subject to the closest scrutiny. Estate of Carr V. Van Anda, 12 T.C. 1158">12 T.C. 1158 (1949), affd. per curiam 192 F.2d 391 (C.A. 2, 1951). Both Joe and Jean testified categorically that at the time of the advances to Jean they both fully expected that the amounts advanced would be repaid. The record does not reveal any indication that a gift was either intended by Joe or imagined by Jean. The consistency of this testimony was in no way impaired by respondent's cross-examination, nor do we have any doubt as to its credibility. Such uncontradicted testimony should not be disregarded except where it is so improbable or unreasonable as to be unbelievable. Carmack v. Commissioner, 183 F.2d 1, 2 (C.A. 5, 1950), affirming a Memorandum Opinion of this Court, certiorari denied 340 U.S. 875">340 U.S. 875 (1950); Frank Imburgia, 22 T.C. 1002">22 T.C. 1002, 22 T.C. 1002">1018 (1954). Such is not the case before us. Respondent has argued that Joe's lack of effort to enforce payment precludes a finding of the existence of valid debt. Such an assertion is not supported1968 Tax Ct. Memo LEXIS 204">212 by the record. Joe was, at all times pertinent hereto, well aware of Jean's financial condition. Consequently, he was aware and was advised by an attorney that any attempt to enforce payment would be to no avail. Under such circumstances his lack of effort to attempt to enforce payment is adequately explained and does not negate the finding by this Court that there existed a bona fide debt. See and compare Income Tax Regs., section 1.166-2(b), supra. Respondent has, on brief, conceded the legality and enforceability of the note. We, therefore, hold that the advances in question constituted a bona fide debt in the hands of the petitioners. We now turn to respondent's second contention, namely that petitioners have not shown that the debt became worthless in the taxable year 1961. Again, we are of the opinion that petitioners have met their burden of proof. In order to be entitled to a deduction for a nonbusiness bad debt, petitioners must demonstrate that the debt became totally worthless during the taxable year. Whether a debt is totally worthless within a particular taxable year is a question of fact. Earl V. Perry, 22 T.C. 968">22 T.C. 968 (1954).1968 Tax Ct. Memo LEXIS 204">213 The record reveals that Jean was solvent at the time the advances were made and at the time that the note was signed by him and Doris Hisgen. Respondent has pointed to various inconsistencies in the financial statements prepared by Jean. Even with these corrections suggested by respondent, the exhibits, introduced by respondent, are sufficient to demonstrate Jean's solvency during the earlier part of 1961 and his insolvency as of December 31, 1961. Jean's 436 testimony regarding the worthlessness of the Hisgen, Inc., stock on December 31, 1961, was uncontradicted, and is amply supported by the windup and dissolution of the business early in 1962. The difference, if any, between his financial condition at this point in 1962 and that existing on December 31, 1961, was de minimis. This Court is aware that the mere insolvency of the debtor standing alone is not proof of the worthlessness of the debt. Rowan v. United States, 219 F.2d 51, 56 (C.A. 5, 1955). The Court must look at all pertinent evidence. Income Tax Regs., section 1.166-2(a), supra. The record reveals that the loans were unsecured. The expected source of repayment, Jean's1968 Tax Ct. Memo LEXIS 204">214 auto rental business, had proved, to say the least, to be unsuccessful, and his stock in Hisgen, Inc., was worthless. The record reveals that the assets of the business when sold brought only enough money to pay off the mortgage to which each of them was subject. He had also fallen substantially behind in his home mortgage payments. These circumstances and the record as a whole make it clear that the loan was uncollectible and that, as noted earlier, a legal action would be futile. Finally, though Jean was in good health, his prospects were dim. Respondent urges that Jean's financial situation may improve considering his youth and health. The evidence, however, demonstrates that as of the time of trial, almost six years later, such has not in fact been the case. We think that such a possibility is, on these facts, too remote to defeat petitioners' claim herein. They need not be incorrigible optimists. See United States v. White Dental Co., 274 U.S. 398">274 U.S. 398 (1927). Decision will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620800/	LAUREN WHITING and ALICE WHITING, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWhiting v. CommissionerDocket No. 7284-73.United States Tax CourtT.C. Memo 1975-38; 1975 Tax Ct. Memo LEXIS 332; 34 T.C.M. 241; T.C.M. (RIA) 750038; February 27, 1975, Filed Lauren Whiting and Alice Whiting, pro se. John D. Steele, Jr., for the respondent. FORRESTERMEMORANDUM FINDINGS OF FACT AND OPINION FORRESTER, Judge: Respondent has determined a deficiency of $1,005.47 in petitioners' 1971 Federal income taxes. Because of concessions by both parties, the only issue remaining for our decision is whether or not petitioners are entitled to a casualty loss deduction for damage to the walls and ceiling of a house caused by the leaking of water through the1975 Tax Ct. Memo LEXIS 332">333 roof of such house. Some of the facts have been stipulated and are so found. Petitioners Lauren C. (hereinafter referred to as petitioner) and Alice T. Whiting are husband and wife who, at the time of the filing of the petition herein, resided in Clarence, New York. They filed their 1971 joint Federal income tax return on the cash basis with the district director of internal revenue, Buffalo, New York. In 1947, petitioner and his former spouse purchased a home in Akron, New York. Sometime in the period 1959 to 1961, petitioner completed an addition to such house. The roof built on such addition was a so-called "wet roof"--a flat roof designed to be covered at all times by approximately four inches of water. In approximately 1961, petitioner and his former spouse were divorced. As a part of the divorce decree, petitioner was given full title to the house, but his former wife was allowed to continue living in the house with the couple's children. Petitioner was required by the decree to pay one-half of the maintenance costs of the house, including, apparently, any mortgage payments. In 1969, petitioner was told by one of his children living in the Akron home that water was1975 Tax Ct. Memo LEXIS 332">334 beginning to leak through the living room ceiling of such home. After further investigation, petitioner discovered that the wet roof above the living room ceiling--the roof which had been put on in the 1959-1961 period--was leaking water, causing a gradual accumulation of water in and above the ceiling structure. The water pressure building up on the ceiling was causing a sagging of the ceiling, and consequent damage to the supporting walls. To temporarily remedy the problem, petitioner altered the design of the roof so that it would drain, and the leakage was substantially reduced because of this alteration. At the same time, petitioner put a new ceiling over the living room. In 1971, petitioner replaced the roof then on the home with the more conventional hip-style roof. He also hired a contractor to repair the still remaining damage to the ceiling and walls of the living room, as well as to perform certain other unrelated work on the house. Out of the total amount paid to the contractor for his efforts, $1,800 is allocable to the work on the ceiling and walls in the living room. On his 1971 return, petitioner deducted this $1,800 amount as a casualty loss, a deduction which1975 Tax Ct. Memo LEXIS 332">335 respondent has disallowed in full. OPINION Pursuant to section 165(c)(3) of the Internal Revenue Code, individuals are allowed deductions for "losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty." It is petitioner's contention that the damage to the walls and ceiling of the Akron home was caused by "other casualty," that is, according to petitioner, the gradual buildup of water pressure on the ceiling because of the leakage through the roof. We cannot agree with petitioner. The term "casualty" in section 165(c)(3) has been consistently defined by the courts as an "accident, a mishap, some sudden invasion by a hostile agency. It excludes the progressive deterioration of property through a steadily operating cause." Fay v. Helvering,120 F.2d 253 (C.A. 2, 1941), affirming 42 B.T.A. 206">42 B.T.A. 206 (1940); Ray Durden,3 T.C. 1">3 T.C. 1, 3 T.C. 1">3-4 (1944); Clinton H. Mitchell,42 T.C. 953">42 T.C. 953, 42 T.C. 953">971-2 (1964); 5 Mertens, Law of Federal Income Taxation, sec. 28.57, pp. 254-6. In the instant case, all petitioner has shown is that the gradual buildup of1975 Tax Ct. Memo LEXIS 332">336 water pressure on the ceiling resulted in the damage to the ceiling and walls. Petitioner seems to think that because the damage to the ceiling was discovered by him, in some sense "suddenly" in 1969, that a casualty loss has been sustained. What he has failed to show, however, is that the cause of the damage--the leakage through the roof and gradual increase in pressure on the ceiling--were not causes which operated gradually over a period of time. The particular roof in question was installed approximately 10 years before the damage was noticed, and it simply cannot be determined from the record before us when the leakage in the roof and consequent accumulation of water in and over the ceiling actually began to occur, and over how long a period of time. 1 Thus, we hold that petitioner has not suffered losses due to casualty as that term is used in section 165(c)(3). 21975 Tax Ct. Memo LEXIS 332">*337 Decision will be entered under Rule 155.Footnotes1. These facts clearly distinguish this case from that presented in Rev. Rul. 70-91, 1970-1 C.B. 37↩. In that ruling a water heater burst causing extensive damage to the taxpayer's household goods. While it was held by the Commissioner that the damage to the heater was nondeductible, because such damage had resulted from a gradual deterioration of the structure of the heater, the taxpayer was allowed to deduct as a casualty loss the damage to his household items. For that damage had been caused by a casualty, i.e. the sudden bursting of the heater. 2. Our disposition of this case makes it unnecessary for us to rely on an equally valid reason for disallowing the deductions herein, that the losses, if caused by a casualty, could only be deducted in the year such were sustained. Such year is clearly not 1971, at which time, two years after the damage was noticed, petitioner made the repairs, the cost of which he is attempting to deduct.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620801/	Old National Bank in Evansville, Petitioner, v. Commissioner of Internal Revenue, RespondentOld Nat'l Bank v. CommissionerDocket No. 61517United States Tax Court28 T.C. 1075; 1957 U.S. Tax Ct. LEXIS 108; August 28, 1957, Filed 1957 U.S. Tax Ct. LEXIS 108">108 Decision will be entered for the respondent. In 1950 the North Side Bank was consolidated with the petitioner, and in 1951, the Franklin Bank and Trust Company was consolidated with the petitioner. At the date of consolidation, the Franklin Bank and Trust Company had an unused excess profits credit of $ 9,286.72. The North Side Bank, in the years prior to the consolidation, computed its excess profits tax credit under the growth formula provided for in sections 435 (e) and 462 (c) (1) (C) of I. R. C. 1939. Held, petitioner, in computing its excess profits tax for the year 1951, is not entitled to a carry-forward under section 432 (c) (2) of the unused excess profits credit of the Franklin Bank and Trust Company; held, further, the "cash" and "loan" items of a bank are not "operating assets" within the meaning of section 435 (g) (10) (B); held, further, the exceptions and limitations of section 435 (g) (10) are applicable to computations under section 435 (g) (9) (B); held, further, petitioner, in computing its excess profits credit by the average income method, is not entitled to the use of the base period capital additions of its "component" corporation, the1957 U.S. Tax Ct. LEXIS 108">109 North Side Bank. Stuart E. White, Esq., for the petitioner.William A. Goffe, Esq., for the respondent. Mulroney, Judge. MULRONEY 28 T.C. 1075">1076 Respondent determined deficiencies in the income and excess profits tax of the petitioner, as follows:YearDeficiency1951$ 9,079.4019522,391.96The issues are (1) whether the petitioner, in computing its excess profits tax, can apply the unused excess profits credit of a bank which was consolidated with petitioner; (2) whether the petitioner, in computing the net capital addition for the taxable year by showing a decrease in inadmissible assets, can include cash and loans as operating assets within the meaning of section 435 (g) (10) (B) of the 1939 Code, 1 and, in the alternative, whether the limitations of section 435 (g) (10) are applicable to section 435 (g) (9) (B); and (3) whether the petitioner, in computing its excess profits credit by the average income method, can use the base period capital additions of a corporation with which it was consolidated1957 U.S. Tax Ct. LEXIS 108">111 in a part II transaction (secs. 461-465), when that other corporation used the growth formula in computing its own average base period net income.FINDINGS OF FACT.Most of the facts were stipulated and the stipulated facts are found accordingly.Old National Bank in Evansville filed its Federal income and excess profits tax returns for the year 1951 with the then collector of internal revenue and for the year 1952 with the district director of internal revenue at Indianapolis, Indiana.28 T.C. 1075">1077 Old National Bank in Evansville was organized August 16, 1923, under the laws of the United States. By an agreement, effective August 16, 1950, with the North Side Bank in the same city, the latter bank was consolidated with, and under the charter of, the Old National Bank in Evansville. By an agreement, effective May 1, 1951, with the Franklin Bank and Trust Company in the same city, the latter bank was consolidated with, 1957 U.S. Tax Ct. LEXIS 108">112 and under the charter of, the Old National Bank in Evansville.On the date of the latter consolidation, the Franklin Bank and Trust Company, after applying its unused excess profits credit to the year 1950, had an unused excess profits credit amounting to $ 9,286.72. Petitioner, in computing its excess profits tax for the year 1951, claimed $ 7,348.24 as an unused excess profits credit, representing the unused excess profits credit of the Franklin Bank and Trust Company.The North Side Bank, prior to the consolidation, computed its excess profits tax credit under the provisions of sections 435 (e) and 462 (c) (1) (C). In 1951 and 1952, the petitioner, in computing its base period capital additions, used the base period capital additions of the North Side Bank.In computing its excess profits tax credit for the years 1951 and 1952, the petitioner did not apply the limitation contained in section 435 (g) (10) to the capital additions resulting from decreases in inadmissible assets.OPINION.The first question is whether petitioner succeeds to the pre-consolidation unused excess profits credit of the Franklin Bank and Trust Company. Section 432 (c) (2) provides, in part:If for 1957 U.S. Tax Ct. LEXIS 108">113 any taxable year ending after June 30, 1950, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-over for each of the five succeeding taxable years, * Petitioner argues there was a statutory 2 merger of the Franklin Bank and Trust Company with petitioner which extinguished the former bank and left petitioner the continuing corporation and after such a merger the continuing corporation is the "taxpayer" within the above statute and can use the credit of its constituent which is an integral part of the continuing corporation. Some of the authorities cited by petitioner give color to its claim. See E. & J. Gallo Winery v. Commissioner, 227 F.2d 699, reversing a Memorandum Opinion of this Court, and Stanton Brewery, Inc. v. Commissioner, 176 F.2d 573, reversing 11 T.C. 310. However, the recent decision of the Supreme Court of the United States in Libson Shops, Inc. v.28 T.C. 1075">1078 , 353 U.S. 382">353 U.S. 382, is, we feel, conclusive authority against petitioner's position.1957 U.S. Tax Ct. LEXIS 108">114 The Libson case presented a situation of a net operating loss deduction carryover under the provisions of section 122 (b) (2) (C) providing, in part, as follows:If for any taxable year beginning after December 31, 1947, and before January 1, 1950, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-over for each of the three succeeding taxable years * In the Libson case, there were 17 separate corporations, with the stock owned directly or indirectly by the same individuals in the same proportion. They all merged into one and the question was whether the continuing corporation could deduct the premerger net operating losses of 3 of the corporations from the postmerger income through the use of the net operating loss carryover provisions.It must be admitted (and the parties here do not argue otherwise) that the evident statutory purpose of the two qouted statutes, dealing with the carryover of an unused excess profits credit and the carryover of a net operating loss, is identical. They are both designed to give the taxpayer some relief from what would otherwise be harsh consequences of fluctuating profits in a continuing1957 U.S. Tax Ct. LEXIS 108">115 enterprise.In the Libson case, the Supreme Court held the petitioner was "not entitled to a carry-over since the income against which the offset is claimed was not produced by substantially the same businesses which incurred the losses."The same must be said of the instant case. The income against which the offset is claimed was not produced substantially by the same business which had the excess profits credit. The opinion in the Libson case pointed out that there was no indication in the legislative history of the carryover and carryback provisions that "these provisions were designed to permit the averaging of the pre-merger losses of one business with the post-merger income of some other business which had been operated and taxed separately before the merger. What history there is suggests that Congress primarily was concerned with the fluctuating income of a single business."The legislative history with respect to the provisions for carryover and carryback of unused excess profits credit is similar to the legislative history for provisions for carryover and carryback of net operating loss. In fact, the Report of the Ways and Means Committee on section 432 (81st1957 U.S. Tax Ct. LEXIS 108">116 Cong., 2d Sess., H. Rept. No. 3142) points out the law produces the same "averaging period used under the net operating loss carry-over for both income and excess profits tax purposes."In principle, the question presented here was decided adversely to petitioner's contention in 353 U.S. 382">Libson Shops, Inc., supra, and we therefore 28 T.C. 1075">1079 hold respondent was right on the first issue and the pre-consolidation unused excess profits credit of Franklin Bank and Trust Company was not available to petitioner after the consolidation.Section 435 outlines the method for computing the excess profits credit based on income. Subsection 435 (g) (9) 31957 U.S. Tax Ct. LEXIS 108">118 deals with the effect on the credit computation of a decrease in the taxpayer's inadmissible assets for the taxable year. Subsection 435 (g) (10) 4 is concerned with certain exceptions and limitations to the adjustments made under subsection 435 (g) (9). Petitioner, as a bank, determined its adjustment due to a decrease in inadmissible assets under subparagraph (B) of subsection 435 (g) (9). Petitioner here 28 T.C. 1075">1080 contends that subsection 435 (g) (10) is not a limiting factor for banks coming under paragraph (B) 1957 U.S. Tax Ct. LEXIS 108">117 of subsection 435 (g) (9). Its argument is based on the wording of subsection 435 (g) (9) and also on certain legislative history.1957 U.S. Tax Ct. LEXIS 108">119 We cannot agree that the wording of subsection 435 (g) (9) supports the petitioner's argument. The last sentence of paragraph (A) of subsection 435 (g) (9) provides that the "amount of the excess so determined shall be subject to the exceptions and limitations provided in paragraph (10)." Under subparagraph (B) it is provided that in the case of a bank "the computation under subparagraph (A)" shall be made by the use of certain substitute amounts. Thus, it is clear that paragraph (B) relates back to paragraph (A), and consequently is within the exceptions and limitations provided in subsection 435 (g) (10).Also, the language found in subsection 435 (g) (10) does not support petitioner's argument. This subsection, after the heading "Exceptions and Limitations for the Purpose of Paragraph (9)," introduces paragraph (A) with the words "For the Purpose of Paragraph (9)." Also, paragraph (B) begins with the words "The amount determined under paragraph (9) shall." Thus it is evident that the exceptions and limitations laid out in subsection 435 (g) (10) apply to both paragraphs (A) and (B) of subsection 435 (g) (9). We have, furthermore, examined all the applicable legislative history1957 U.S. Tax Ct. LEXIS 108">120 and we do not anywhere find support for the argument advanced by the petitioner. S. Rept. No. 781, Part 2, 82d Cong., 1st Sess., 1951-2 C. B. 545, 608 (explaining section 507 of H. R. 4473, which became subsections 435 (g) (9) and (g) (10)).Petitioner, in the alternative, argues that if we should find, as we do, that subsection 435 (g) (10) is applicable to all of subsection 435 (g) (9), it was the congressional intent that "operating assets," as that term is used in subsection 435 (g) (10) (B) (ii), should include petitioner's items "cash and due from banks" and "loans and discounts." Briefly, petitioner contends that "operating assets" of a bank include cash and loans. We cannot agree. Subsection 435 (g) (10) (B) defines "operating assets," for the purpose of the determination under that subsection, as: (i) property used in the taxpayer's trade or business within the meaning of section 117 (j) (1) except that such property need not be held more than six months, and(ii) stock in trade or other property of a kind which would properly be includible in the inventory of the taxpayer if owned at the close of the taxable year, and property held by the1957 U.S. Tax Ct. LEXIS 108">121 taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business,except any such assets which constitute inadmissible assets, stock, securities, or intangible property (such intangible property not being limited to the property described in section 441 (i)).28 T.C. 1075">1081 The regulations under these sections specifically exclude cash as an operating asset. 5 We believe that the respondent's regulations correctly interpret the scope of the term "operating assets." In section 507 of a supplemental report of the Senate Finance Committee there are specifically excluded from the term "operating assets" the items "inadmissible assets, stock, securities, and intangible property (such as evidence of indebtedness)." (Emphasis supplied.) S. Rept. No. 781, Part 2, 82d Cong., 2d Sess., 1951-2 C. B. 545, 608. It is obvious, therefore, that Congress intended to eliminate loans from the scope of operating assets. Nor do we think that the item "cash" is the type of property includible in "operating assets" as that term is used in section 435 (g) (10) (B). Cash, in the hands of a bank, cannot be considered as a type of property1957 U.S. Tax Ct. LEXIS 108">122 which is held for sale to customers or includible in inventory. A bank, for the most part, renders services of a financial nature, and we think that petitioner's analogy of a mercantile-type establishment is misleading. A bank cannot be said to be engaged in the sale of cash to its customers, nor do we think that cash can be considered "property used in trade or business" within the meaning of sections 435 (g) (10) (B) and 117 (j) (1).1957 U.S. Tax Ct. LEXIS 108">123 A third issue also involves the computation of the petitioner's excess profits credit for the taxable years. Petitioner, an "acquiring corporation" within the meaning of section 461 (a) (3), computed its excess profits credit under the provisions of chapter 1, subchapter D, part II. The North Side Bank, a "component corporation" within the meaning of subsection 461 (b) (3), computed its average base period net income, prior to the consolidation, under the so-called growth formula. Sec. 435 (e). Petitioner, in computing its credit under the average income method, sought to take advantage of the base period capital additions of its component corporation, the North Side Bank, under section 464. Section 464 provides, in part, as follows:SEC 464. CAPITAL CHANGES DURING THE BASE PERIOD.For the purposes of section 435 (f), if the transaction which constitutes the taxpayer an acquiring corporation occurred during or after the beginning of the second taxable year preceding the first taxable year of the acquiring corporation under this subchapter, and the acquiring corporation's average base period net income is computed by application of this part, the following rules shall apply 1957 U.S. Tax Ct. LEXIS 108">124 in computing the base period capital addition of such acquiring corporation:28 T.C. 1075">1082 (a) In the case of a transaction, other than a transaction described in section 461 (a) (1) (E), which -- (1) occurred during or after the first taxable year of the acquiring corporation under this subchapter, for the purposes of section 435 (f), the base period capital addition of the acquiring corporation for the taxable year in which the transaction occurred shall be the sum of: (A) the base period capital addition of the acquiring corporation, and(B) so much of the base period capital addition of a component corporation as is proportionate to the ratio which the number of days in the taxable year of the acquiring corporation after the transaction bears to the number of days in such taxable year;and the base period capital addition of the acquiring corporation for any taxable year thereafter shall be the aggregate of the base period capital addition of the acquiring corporation and the base period capital addition of such component corporation.It is obvious that these adjustments for base period capital additions are to be made for "the purposes of section 435 (f)." Section 4351957 U.S. Tax Ct. LEXIS 108">125 (f) outlines the method of computing capital additions in the base period. Such capital additions, as pointed out above, enter into the computation of excess profits credit under the average income method, but do not enter into the computation of the credit based on growth which in reality is an alternative method. There is no reference in section 464 (a) (1) to section 435 (e). We agree with the respondent that it would be inconsistent to allow a taxpayer, computing its credit under the average income method, to use the base period capital additions of a taxpayer which has chosen the benefits of the growth formula in its prior excess profits tax returns. Respondent has embodied this interpretation of the pertinent sections in his regulations. Regs. 130, sec. 40.464-1. 6 Our examination of the statute convinces us that this regulation is not unreasonable or inconsistent with the statute, and is, therefore, valid. Fawcus Machine Co. v. United States, 282 U.S. 375">282 U.S. 375.1957 U.S. Tax Ct. LEXIS 108">126 Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1939, as amended, unless otherwise noted.↩2. 12 U.S. C., sec. 34↩ (a).3. SEC. 435. EXCESS PROFITS CREDIT -- BASED ON INCOME.(g) Net Capital Addition or Reduction. -- * * (9) Decrease in inadmissible assets. -- (A) Except as otherwise provided in subparagraph (B) (relating to banks), the excess of the amount computed under paragraph (2) (A) or (B), whichever is applicable to the taxpayer (whether or not any amount is determined under the first sentence of paragraph (2)), over the amount, if any, computed under the first sentence of paragraph (2) shall be considered the net capital addition for the taxable year or shall be added to the net capital addition otherwise determined under paragraph (1), as the case may be. The amount of the excess so determined shall be subject to the exceptions and limitations provided in paragraph (10).(B) In the case of a bank (as defined in section 104), the computation under subparagraph (A) shall be made by substituting for the amount computed under paragraph (2) (A) or (B) whichever of the following amounts is the lesser:(i) An amount which bears the same ratio to the decrease in inadmissible assets as the sum of the equity capital (as defined in section 437 (c)) and the daily borrowed capital (as defined in section 439 (b)), each determined as of the first day of the first taxable year ending after June 30, 1950, bears to the total assets as of the beginning of such day;↩4. SEC. 435. EXCESS PROFITS CREDIT -- BASED ON INCOME.(g) Net Capital Addition or Reduction. -- * * (10) Exceptions and limitations for the purpose of paragraph (9). -- For the purpose of paragraph (9) -- (A) The adjustment to the decrease in inadmissible assets required under subparagraph (B) of paragraph (2) shall not be greater than 25 per centum of the excess of the net capital reduction computed under the first sentence of paragraph (2) (and computed without regard to the percentage limitations in paragraph (4) (C) and (E)) over the net capital reduction computed under such sentence without regard to paragraph (4) (C) and (E).(B) The amount determined under paragraph (9) shall not be greater than the excess of the increase in operating assets for the taxable year over the net capital addition (determined without regard to paragraph (9) and determined without regard to the limitation to 75 per centum provided in paragraph (3) (C) and paragraph (4) (C) and (E)). For the purpose of the preceding sentence, the increase in operating assets for the taxable year shall be determined in the same manner as the increase in inadmissible assets for the taxable year is determined under paragraph (5). For the purpose of such determination, the term "operating assets" means --(i) property used in the taxpayer's trade or business within the meaning of section 117 (j) (1) except that such property need not be held more than six months, and(ii) stock in trade or other property of a kind which would properly be includible in the inventory of the taxpayer if owned at the close of the taxable year, and property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business,except any such assets which constitute inadmissible assets, stock, securities, or intangible property (such intangible property not being limited to the property described in section 441 (i)).↩5. Regulations 130, sec. 40.435-7.(g) Decrease in Inadmissible Assets. -- (1) In general. -- * * The term "operating assets" means (i) property used in the taxpayer's trade or business within the meaning of section 117 (j) (1) determined without regard to any holding period specified in such section, and (ii) stock in trade or other property of a kind which would properly be includible in the inventory of the taxpayer if owned at the close of the taxable year, and property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpaper's trade or business. Such term does not include cash, inadmissible assets, stock, securities, or intangible property, whether or not such intangible property is described in section 441 (i). * * ↩6. * * No base period capital addition shall be allowed the acquiring corporation with respect to any corporation a party to the Part II transaction (whether the acquiring or component corporation) the monthly excess profits net income of which is computed under section 435 (e) and section 462 (c) (1) (C) * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620804/	John E. Bauer and Hazel E. Bauer v. Commissioner.Bauer v. CommissionerDocket No. 1483-70 SC.United States Tax CourtT.C. Memo 1970-358; 1970 Tax Ct. Memo LEXIS 5; 29 T.C.M. 1784; T.C.M. (RIA) 70358; December 31, 1970, Filed John E. Bauer, pro se, 5816 Etwanda Ave., Tarzana, Calif. Lawrence Weisensee, for the respondent. SACKS Memorandum Findings of Fact and Opinion SACKS, Commissioner: Respondent determined a deficiency in the income tax of petitioners for the year 1967 in the amount of $522.07. One of the issues raised by petitioners having been settled by agreement of the parties, the sole issue remaining for decision is whether petitioners are entitled, in the year 1967, to a deduction for certain items listed on their return as "bad debts from construction business - uncollectable." 1785 Findings of Fact Some of the facts have been stipulated by the parties. Their stipulation, together with an attached exhibit, is incorporated herein by this reference. 1970 Tax Ct. Memo LEXIS 5">6 John E. and Hazel E. Bauer are husband and wife who resided in Tarzana, California at the time their petition was filed herein. Their joint return for the year 1967, made on the cash basis and for the calendar year period, was filed with the district director of internal revenue, Los Angeles, California. Hazel E. Bauer has been joined herein solely by virtue of her participation in filing the above joint return. Therefore, as used hereinafter, the term "petitioner" will refer only to John E. Bauer. Sometime during the year 1953 petitioner organized, as a sole proprietorship, a home improvement business known as "John E. Bauer Construction." Its principal place of business was 10 Tarry Lane, Levittown, New York. In 1959 this business was terminated by petitioner, and he thereafter moved with his family to California, where he now resides. At the time petitioner terminated the business of John E. Bauer Construction there remained owing, from certain former customers, amounts due on open account. At least five of these accounts petitioner left for collection with an attorney in Levittown named Max Weiner. Thereafter, and subsequent to petitioner's move to California, Weiner wrote1970 Tax Ct. Memo LEXIS 5">7 to him concerning these accounts. The date of Weiner's letter is June 7, 1961, and the clear implication thereof is that the accounts left with him by petitioner were uncollectible. Petitioner filed Weiner's letter, together with other records of his former business, away in his garage and forgot about the matter. Then, in the summer of 1967, some six years later, while making a search through his old records in connection with another matter, petitioner came upon a file containing the Weiner correspondence and other documents relating to the open accounts of John E. Bauer Construction. From this file he selected, on a basis not clear from the evidence, several accounts which he then claimed as bad debts on his joint income tax return for the year 1967. Upon audit of petitioner's return, respondent disallowed these claimed bad debts on the grounds that petitioner had failed to prove that (1) any debts in fact existed, (2) that if they did exist, they were worthless and (3) that if they were worthless, such worthlessness occurred in the taxable year 1967, the year at issue. Ultimate Finding of Fact Petitioner has failed to prove that he is entitled to any deduction for bad1970 Tax Ct. Memo LEXIS 5">8 debts in the taxable year 1967. Opinion Section 166(a) of the Internal Revenue Code of 1954 provides that there shall be allowed as a deduction any debt which becomes worthless within the taxable year. It is clear from the regulations (section 1.166-1 and 2, Income Tax Regs.) that in order to be entitled to the statutory deduction, a taxpayer must establish (1) a bona fide debt, (2) which became worthless, (3) in the taxable year in which it is claimed as a deduction. The requirements of the regulation are cumulative and failure to establish any one of the requisite elements must result in rejection of the claimed deduction. In his representation of himself petitioner was concise and to the point. The Court was impressed with his candor. He testified that when he terminated his home improvement business in 1959 there were some accounts still open. This the Court believes. He testified that he had made attempts to collect some of these accounts and met, as he was advised by his lawyer in 1961, with limited or no success. He further testified that he could not substantiate the exact amounts claimed on his return for 1967 as bad debts, and in any event it was1970 Tax Ct. Memo LEXIS 5">9 his belief that each of such debts had become uncollectible prior to 1967. These being the facts as adduced upon the record, we have no alternative but to hold that petitioner has failed to establish, within the purview of section 166 and the regulations thereunder, that he is entitled to a deduction for the items claimed on his joint return for 1967 as bad debts. Reviewed and adopted as the report of the Small Tax Case Division. To reflect our opinion herein and the agreement of the parties, Decision will be entered under Rule 50.1786	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620805/	SONEL RESEARCH AND DEVELOPMENT, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSonel Research & Dev. v. CommissionerDocket No. 3554-72.United States Tax CourtT.C. Memo 1975-235; 1975 Tax Ct. Memo LEXIS 137; 34 T.C.M. 1021; T.C.M. (RIA) 750235; July 16, 1975, Filed 1975 Tax Ct. Memo LEXIS 137">137 W. Vaughn Ellsworth, for the petitioner. Harry Beckhoff, for the respondent. FORRESTERMEMORANDUM FINDINGS OF FACT AND OPINION FORRESTER, Judge: Respondent has determined a deficiency of $60,482.93 in petitioner's 1968 calendar year Federal income tax. The issue before us is whether respondent erred in disallowing the following items claimed as deductions on petitioner's 1968 return: travel expenses, subcontract and service fees, research expenses, and a net operating loss carryover from petitioner's 1967 taxable year. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Sonel Research and Development, Inc. (Sonel or petitioner), is an Arizona corporation which filed its cash basis 1967 calendar year corporate income tax return with the District Director of Internal Revenue, Phoenix, Arizona. It filed its 1968 return, also on the cash basis, with the Director of the Western Service Center in Ogden, Utah. When it filed these returns, Sonel's principal place of business was located in Mesa, Arizona. By the time of the filing of the petition herein, however, Sonel had become inactive, although it had not been legally dissolved under1975 Tax Ct. Memo LEXIS 137">138 Arizona law. From the date of its incorporation, on April 13, 1967, until sometime in the spring of 1970, Sonel was an active corporation whose principal business activity was research and development. The company, through its own employees and third-party subcontractors, worked on projects involving copper recovery, the manufacture of fiberglas pipes and tanks and machinery to construct them, and on other projects in the fields of mining and chemistry. In connection with certain of these projects, company employees would travel to the actual work sites to supervise or carry out particular tasks. While Sonel maintained books and records of its operations, these were not produced at trial for the verification of any of the disputed expenses. The record stands barren of any evidence which could be of assistance in determining which of the above-described projects were being carried on in 1968, what amount of expense was incurred on particular projects, or even what amount, on an average, was incurred by Sonel on individual projects, in 1968 or any other year. On its 1968 corporate income tax return, Sonel claimed the following as expenses incurred in its trade or business: Car expenses2,144.06Insurance1,156.29Interest1,847.50Traveling expenses6,043.72Repairs and Supplies3,469.56Miscellaneous4,967.73Subcontracts and services fees39,579.21Research52,297.15Wages25,124.57Telephone and Utilities4,317.34Rent3,250.00Rental Equipment3,273.74Payroll Taxes2,470.04Materials8,030.79Taxes118.23Legal144.00Depreciation - Schedule341.50158,575.431975 Tax Ct. Memo LEXIS 137">139 Petitioner also claimed a loss carryover from its 1967 taxable year. In his statutory notice of deficiency, respondent disallowed in full all expenses claimed for traveling, research, and subcontracts and service fees. He further determined that petitioner was not entitled to a loss carryover from 1967. OPINION On its 1968 corporate income tax return, petitioner took deductions for travel, research, subcontracts and service-fees expenses, and for a net operating loss carryover from 1967. Respondent having determined that petitioner may not deduct any amount of such claimed items, it becomes petitioner's burden to demonstrate its entitlement to some or all of the deductions taken. Welch v. Helvering,290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.Instead of producing its original books and records for the purpose of substantiating the deductions claimed, petitioner paraded numerous ex-corporate officers and ex-employees of Sonel past the court during the trial of the instant case. Each testified, but in the most general terms, that petitioner had indeed been involved in research during its approximately three years of active1975 Tax Ct. Memo LEXIS 137">140 existence, and that officers of the company had traveled in connection with Sonel's business. We find such general statements entirely insufficient to establish Sonel's entitlement to deductions for the items claimed in the year before us. None of petitioner's witnesses could testify to the specific year in which a specific project was carried out or to the specific year in which a particular trip was taken in connection with a project. We might very well have attempted to make some sort of approximation of petitioner's expenses for 1968 had its witnesses testified about the costs of individual projects, even if the actual year involved had not been specified with precision. 1 This, too, however, petitioner failed to elicit from its witnesses. Thus, it is our finding that petitioner has failed to carry its burden of proof in the instant case and we uphold respondent's disallowances of the deductions claimed for alleged travel, research, subcontracts and service fees expenses. 1975 Tax Ct. Memo LEXIS 137">141 We must reach the same result as to petitioner's claim to a net operating loss carryover from its 1967 taxable year. At best, petitioner's witnesses established that Sonel experienced a cash drain in 1967. This is simply not enough to prove that Sonel had a net operating loss for tax purposes in that year. Petitioner argues that respondent's disallowances were arbitrary and capricious, and hence that it was respondent's burden to show that petitioner was not entitled to deduct the items in dispute. See Helvering v. Taylor,293 U.S. 507">293 U.S. 507, 293 U.S. 507">514-516 (1935). Suffice it to say that we find not a shred of evidence in the record to support petitioner's allegation, and that it thus remained petitioner's burden to substantiate the deductions, a burden petitioner has failed to carry. Petitioner also made a number of constitutional arguments directed more against the Court than against respondent. He first argued that the seventh amendment of the Constitution provides him with the right to a jury trial in the Tax Court. We stand by our decision in Emma R. Dorl,57 T.C. 720">57 T.C. 720, 57 T.C. 720">722 (1972), however, that there is no right to a jury trial in this Court. See Wickwire v. Reinecke,275 U.S. 101">275 U.S. 101, 275 U.S. 101">105 (1927);1975 Tax Ct. Memo LEXIS 137">142 Olshausen v. Commissioner,273 F.2d 23, 26-27 (9th Cir. 1959), affirming, in part, a Memorandum Opinion of this Court, cert. denied 363 U.S. 820">363 U.S. 820 (1960). Petitioner further argues that this Court, because of its exercise of judicial power, stands in violation of Article III of the Constitution. Again, however, we have previously considered and rejected this argument. Burns, Stix Friedman & Co.,57 T.C. 392">57 T.C. 392 (1971). Petitioner, at the trial and in his briefs, advanced numerous other arguments of a highly frivolous nature. We think no useful purpose would be served by responding to them here. Decision will be entered for the respondent.Footnotes1. It is to be noted that respondent did not challenge deductions of over $25,000 for "wages," and of over $8,000 for "materials." Before we could attempt an approximation of the disallowed items, we would have to have some evidence as to within which expense categories petitioner placed different items of cost arising from a particular project. Again, the record is devoid of such evidence.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620809/	National Butane Gas Co., Petitioner, v. Commissioner of Internal Revenue, RespondentNational Butane Gas Co. v. CommissionerDocket No. 16725United States Tax Court11 T.C. 593; 1948 U.S. Tax Ct. LEXIS 60; October 13, 1948, Promulgated 1948 U.S. Tax Ct. LEXIS 60">60 Respondent's motion to dismiss is, accordingly, denied. On May 7, 1945, respondent assessed a deficiency in excess profits tax for the year 1941, theretofore determined against petitioner, and two days later this assessment was paid. At these times the respondent was not barred by any statute of limitations from making such assessment. However, prior to the making of this assessment the parties had executed a waiver extending the period of limitation to June 30, 1946. During a part of the period of this extension subsequent to May 1945 respondent could have made an assessment only by reason of such waiver. No assessment was made after May 1945. On April 28, 1947, petitioner filed, under section 722, an application for relief of excess profits tax, claiming a refund of the excess profits tax paid on May 9, 1945. Respondent rejected this claim as untimely filed on the ground that the provisions of section 322 (b) (3), I. R. C., were made retroactive to the taxable year 1941 by section 509 (a) of the Revenue Act of 1943. A petition to review this action having been filed, respondent has moved that it be dismissed for the same reason. Held, under facts alleged, section 5091948 U.S. Tax Ct. LEXIS 60">61 (a) of the Revenue Act of 1943 does not apply, and time for filing is that provided by section 322 (b) (1), I. R. C.Lewis R. Donelson, III, Esq., for the petitioner.Edwin L. Kahn, Esq., for the respondent. Kern, Judge. Van Fossan, J., dissents. Disney, J., dissenting. Opper, J., agrees with this dissent. KERN 11 T.C. 593">594 OPINION.The petition herein, which was filed on December 15, 1947, asks for a review of the action of respondent in denying petitioner's1948 U.S. Tax Ct. LEXIS 60">63 application for relief under section 722 of the Internal Revenue Code, claiming a refund of the amount of a deficiency in excess profits tax for 1941 assessed and paid in 1945. On February 13, 1948, the respondent moved that the petition be dismissed. Upon this motion a hearing was held and oral arguments heard; and briefs were subsequently filed by the parties.The facts as alleged in the petition and shown in exhibits attached thereto may be summarized as follows:Petitioner filed its excess profits tax return for the year 1941 on March 15, 1942. In December 1944 petitioner executed a waiver under section 276 (b) of the Internal Revenue Code, the effect of which was to extend the period of limitation from March 16, 1945, to June 30, 1946. On January 1, 1945, a report of the internal revenue agent proposed the determination of a deficiency in excess profits tax for the year 1941 in the sum of $ 4,652.66. On February 15, 1945, the respondent issued a formal notice of deficiency determining the deficiency as proposed by the internal revenue agent. On March 1, 1945, petitioner executed a waiver of the provisions of section 272 of the Internal Revenue Code under 272 (d) and a consent1948 U.S. Tax Ct. LEXIS 60">64 to the immediate assessment of the proposed deficiency. On May 7, 1945, respondent issued an assessment of deficiency in excess profits tax in the amount of $ 4,652.66, plus interest in the amount of $ 850.48, and this amount was paid by petitioner pursuant to this assessment on May 9, 1945. On April 28, 1947, petitioner filed, under section 722, an application for relief of excess profits tax with respect to its excess profits tax taxable year 1941, claiming a refund of excess profits tax paid on May 9, 1945. On September 16, 1947, petitioner was formally notified of the rejection by the respondent of this application for relief and claim for 11 T.C. 593">595 refund. The reason stated for this rejection was that petitioner's claim was untimely filed because of the provisions of section 722 (d) and section 322 (b) (3) of the Internal Revenue Code.Section 722 (d) was added to the Internal Revenue Code by the Second Revenue Act of 1940. It reads as follows:(d) Application for Relief Under This Section. -- The taxpayer shall compute its tax, file its return, and pay the tax shown on its return under this subchapter without the application of this section, except as provided in section1948 U.S. Tax Ct. LEXIS 60">65 710 (a) (5). The benefits of this section shall not be allowed unless the taxpayer within the period of time prescribed by section 322 and subject to the limitation as to amount of credit or refund prescribed in such section makes application therefor in accordance with regulations prescribed by the Commissioner with the approval of the Secretary. If a constructive average base period net income has been determined under the provisions of this section for any taxable year, the Commissioner may, by regulations approved by the Secretary, prescribe the extent to which the limitations prescribed by this subsection may be waived for the purpose of determining the tax under this subchapter for a subsequent taxable year.At the time of the enactment of section 722 (d), the only pertinent period of limitation contained in section 322 was set forth in section 322 (b) (1). It reads as follows:(1) Period of limitation. -- Unless a claim for credit or refund is filed by the taxpayer within three years from the time the return was filed by the taxpayer or within two years from the time the tax was paid, no credit or refund shall be allowed or made after the expiration of whichever of such1948 U.S. Tax Ct. LEXIS 60">66 periods expires the later. If no return is filed by the taxpayer, then no credit or refund shall be allowed or made after two years from the time the tax was paid, unless before the expiration of such period a claim therefor is filed by the taxpayer.Section 322 (b) (3) was added to the Internal Revenue Code by section 169 (c) of the Revenue Act of 1942, and was, at the time of enactment, applicable only to taxable years beginning after December 31, 1941. Section 322 (b) (3) reads as follows:(3) Exceptions in the case of waivers. -- If both the Commissioner and the taxpayer have, within the period prescribed in paragraph (1) for the filing of a claim for credit or refund, agreed in writing under the provisions of section 276 (b) to extend beyond the period prescribed in section 275 the time within which the Commissioner may make an assessment, the period within which a claim for credit or refund may be filed, or credit or refund allowed or made if no claim is filed, shall be the period within which the Commissioner may make an assessment pursuant to such agreement or any extension thereof, and six months thereafter, except that the provisions of paragraph (1) shall apply to any1948 U.S. Tax Ct. LEXIS 60">67 claim filed, or credit or refund allowed or made, before the execution of such agreement. The amount of the credit or refund shall not exceed the total of the portions of tax paid (A) during the two years immediately preceding the execution of such agreement, or, if such agreement was executed within three years from the time the return was filed, during the three years immediately preceding the execution of such agreement, (B) after the execution of the agreement and before the expiration of the period within which the Commissioner might make an assessment pursuant to such agreement or any extension thereof, 11 T.C. 593">596 and (C) during six months after the expiration of such period, except that the provisions of paragraph (2) shall apply to any claim filed, or credit or refund allowed, before the execution of the agreement. If any portion of the tax is paid after the expiration of the period within which the Commissioner might make an assessment pursuant to such agreement, and if no claim for credit or refund is filed after the time of such payment and before the end of six months after the expiration of such period, then credit or refund may be allowed or made if a claim therefor1948 U.S. Tax Ct. LEXIS 60">68 is filed by the taxpayer within six months from the time of such payment, or, if no claim is filed within such six-month period after the payment, if the credit or refund is allowed or made within such period, but the amount of the credit or refund shall not exceed the portion of the tax paid during the six months immediately preceding the filing of the claim, or, if no claim was filed (and the credit or refund is allowed after six months after the expiration of the period within which the Commissioner might make an assessment), during the six months immediately preceding the allowance of the credit or refund.By section 509 (a) of the Revenue Act of 1943, set out in the margin, 1 the provisions of section 322 (b) (3) were made retroactive to years prior to January 1, 1942, "only if on or at some time after the date of the enactment of the Revenue Act of 1943 the Commissioner may assess the tax for such taxable year solely by reason of having made * * an agreement with the taxpayer pursuant to section 276 (b) of the Internal Revenue Code * * * to extend beyond the time prescribed in section 275 * * * the date within which the Commissioner may assess the tax."1948 U.S. Tax Ct. LEXIS 60">69 Since the taxable year here involved is 1941, the first question for our decision is whether section 322 (b) (3) is applicable by reason of section 509 (a) of the Revenue Act of 1943. Petitioner contends that it would be applicable only if the assessment of tax for 1941 could have been made by the respondent "solely by reason of having made * * an agreement with the taxpayer pursuant to section 276 (b) * * ." If section 322 (b) (3) is not applicable, then the period of limitation would be " * * two years from the time the tax was paid * * " under section 322 (b) (1), i. e., two years from May 9, 1945, and the filing of the claim on April 28, 1947, would be within that period.Could the assessment of tax for 1941, made by respondent on May 7, 1945, have been made by him even if no waiver had been executed 11 T.C. 593">597 pursuant to section 276 (b)? It is our opinion that it could have been.The petitioner's excess profits tax return for the year 1941 was filed on March 15, 1942. Ordinarily, under section 275 of the Internal Revenue Code, the period of limitation upon assessment and collection would be three years thereafter, or until March 15, 1945. However, on February 15, 1945, 1948 U.S. Tax Ct. LEXIS 60">70 the respondent issued a notice of deficiency to petitioner with regard to its excess profits tax for 1941. Under section 272 (a) (1) of the Internal Revenue Code, no assessment of the deficiency could have been made by respondent during 90 days thereafter. Section 277 of the Internal Revenue Code provides that "the running of the statute of limitations provided in section 275 * * on the making of assessments * * * shall (after the mailing of a notice under section 272 (a)) be suspended from the period during which the Commissioner is prohibited for making the assessment * * * and for sixty days thereafter." Thus, in the instant case, the period of limitation which ordinarily would have run on March 15, 1945, was suspended by reason of the issuance of the notice of deficiency by respondent on February 15, 1945, and therefore, did not expire until after the payment by petitioner on May 9, 1945, of the tax assessed. Since the tax here involved was assessed by the Commissioner on May 7, 1945, it can not be said that it might have been assessed solely by reason of any agreement pursuant to section 276 (b) of the Internal Revenue Code.Respondent does not contend that his assessment1948 U.S. Tax Ct. LEXIS 60">71 on May 7, 1945, was made solely by reason of the waiver executed by the parties under section 276 (b). His argument is to the effect that the actual assessment made by him on May 7 is immaterial. He reasons that at least during the period July 15, 1945, to June 30, 1946, the Commissioner had the authority to make other assessments, and if such assessments had been made, they could have been made solely by reason of the waiver under section 276 (b). Therefore, he concludes section 322 (b) (3) is made applicable by section 509 (a) of the Revenue Act of 1943, since he might have made assessments solely by reason of the waiver.The Congressional purpose of adding section 3 to section 322 (b) of the code was unmistakably remedial. In both the House and Senate reports on the Revenue Act of 1942 (see C. B. 1942-2, pp. 460 and 619), the following language is used:Sub-Section (a) of this Section of the Bill adds paragraph 3 to Section 322 (b) to give the taxpayer the right to file a claim for credit or refund during the extended period and during six months thereafter, in case an overpayment is discovered after the time for obtaining credit or refund of such overpayment under the provisions1948 U.S. Tax Ct. LEXIS 60">72 of Section 322 (b) (1) and (2).11 T.C. 593">598 The situation sought to be remedied is described in Mertens, Law of Federal Income Taxation, 1947 Supplement, § 58.31, as follows:For many years it had been a source of irritation to taxpayers that after a waiver was executed the Commissioner during the period the waiver was in effect could make an additional assessment after a re-examination, whereas the taxpayer was not allowed to make a corresponding claim for refund if the re-examination showed an overpayment.This situation was corrected by the 1942 Act which amended the Code so that it now provides that the taxpayer may make a claim for refund during the period of the waiver and six months thereafter, regardless of the operation of the statute otherwise limiting filing of claims.We are of the opinion that section 509 (a) is also remedial in nature since its purpose is to make retroactive the remedial provisions of section 322 (b) (3). As such it should be liberally construed to effectuate the objectives sought. The construction placed upon it by respondent as applied to the facts of the instant case, in our opinion, does not conform to this rule of statutory construction, but, to1948 U.S. Tax Ct. LEXIS 60">73 the contrary, would make a provision intended to liberalize the period of limitation in certain cases, work to the decided disadvantage of the taxpayer.The only assessment made which involves the taxes actually paid and in dispute was made on May 7, 1945, and was not made solely by reason of the waiver executed pursuant to section 276 (b). The fact that general language was used in section 509 (a) of the Revenue Act of 1943 which might have made section 322 (b) (3) applicable to assessments made after May 9, 1945, or to claims for relief and refund made without reference to any assessment, does not, in our opinion, make it applicable to the payment of an assessment actually and concededly made not solely by reason of a waiver executed by the parties under section 276 (b). In view of the general purpose of the legislation, we think that respondent's reading of section 509 (a), supra, places too great an emphasis on the word "may" and not enough on the words "assess the tax for the taxable year solely by reason of having made * * * an agreement * * ." Cf. concurring opinion of Murdock, J., in Alice Wilson, 23 B. T. A. 644, 648.Both section1948 U.S. Tax Ct. LEXIS 60">74 169(c) of the Revenue Act of 1942 and section 322 (b) (3) repeatedly refer to the assessment of a tax. The latter section makes specific reference to sections 275 and 276. By section 275 the general rule is stated that the period of limitation upon assessment shall be "within three years after the return is filed." Section 322 (b) (1) provides that the period of limitation upon filing of claims for refunds shall be (1) three years from the time the return was filed, or (2) two years from the time the tax was paid. The first period of limitation prescribed by section 322 (b) (1) is the same as that prescribed by section 275 upon assessments (three years after 11 T.C. 593">599 the return was filed). The period prescribed by section 275 upon assessments could be extended by waiver executed under section 276 (b). The purpose of sections 169 (c) of the Revenue Act of 1942 and 322 (b) (3) of the code was to make an equivalent extension of the period of limitation upon claims for refunds which otherwise would have been barred.In the instant case there was an actual payment of the tax, for which refund is claimed, pursuant to an assessment which was valid without regard to waivers executed1948 U.S. Tax Ct. LEXIS 60">75 by the parties under section 276 (b). By virtue of section 322 (b) (1) the taxpayer could file a claim for refund within two years after the tax was paid. This is not, in our opinion, a situation which caused the enactment of section 322 (b) (3), or which Congress intended to cause a retroactive application of section 169 (c) of the Revenue Act of 1942.We conclude that, upon the facts alleged in the petition, section 322 (b) (1) of the Internal Revenue Code, rather than section 322 (b) (3), is applicable to the instant case in determining the period prescribed for the filing of an application for relief under section 722 (d) of the Internal Revenue Code. Since it follows from this conclusion that petitioner's application was timely filed, it is unnecessary to consider or decide other contentions made by the parties.Respondent's motion to dismiss is, accordingly, denied. DISNEYDisney, J., dissenting: I must dissent. Section 169 (c) of the Revenue Act of 1942, as amended by section 509 (a) of the Revenue Act of 1943, applied the new law as to time for filing claims under section 722 (by reference to section 322 (b) (3) and making its provisions effective instead of those 1948 U.S. Tax Ct. LEXIS 60">76 of section 322 (b) (1)) to 1941, the year here involved. In short, the new law in section 322 (b) (3) provided that if there was a waiver under section 276 (b), the statutory period for filing claims should be the period of waiver plus six months -- instead of two years from the date of payment (so far as here concerned). The petitioner here filed its claim for relief under section 722 within two years from date of payment and contends that such filing was timely; while the Government contends that the proper period under section 322 (b) was the period of waiver plus six months, which had expired. The majority view sustaining the petitioner's contention is at least greatly affected, if not controlled, by the idea that the statutes are remedial in nature and should be liberally construed, and that the respondent's view does not permit such liberal construction. But another taxpayer who had filed his claim, not within 11 T.C. 593">600 two years from date of payment but within six months after the end of the period of waiver, might, with equal logic, contend that it would be illiberal interpretation to say that under the statutes he did not have the period of waiver plus six months for the1948 U.S. Tax Ct. LEXIS 60">77 filing of his claim. Certain it is that the majority opinion lays down the rule as to taxable years beginning prior to January 1, 1942, that the claim could be filed only within two years after the tax was paid (or within three years from the filing of return, not here involved). I see no reason, either in the statute or in the rules of interpretation, to deny retroactivity to the rule allowing the waiver period plus six months for filing the claims under section 722. On the contrary I think the statute and the quotation from Merten's on Federal Income Taxation, set forth in the majority opinion, indicates sound reason for such retroactivity. First, section 169 (c) of the 1942 Act, as amended, provides in language that there shall be retroactivity if "at some time after * * the enactment of the Revenue Act of 1943 the Commissioner may assess * * * solely by reason of having made * * * an agreement with the taxpayer pursuant to section 276 (b) * * * to extend * * " the date for assessment. Here clearly there was a period when the Commissioner could have assessed only by virtue of a waiver under section 276 (b). The majority opinion, indeed, does not seem to deny this, for 1948 U.S. Tax Ct. LEXIS 60">78 it is based upon the fact that there was on May 7, 1945, an assessment followed by payment thereof on May 9, 1945, and for reasons not very clear to me, but apparently because of the idea that therefore the Commissioner could not again assess, concludes that petitioner's views should be sustained, although in December 1944 petitioner had executed a waiver under section 276 (b) extending the period of limitation to June 30, 1946. It seems to me completely plain that the assessment on May 7, 1945, did not prevent an additional assessment up to June 30, 1946, and that, therefore, there was a period May 15, 1945, to June 30, 1946, when the Commissioner could have assessed, but solely because of the waiver and hence the statute section 169 (c), as amended, is satisfied and retroactivity of the waiver plus a six-month period is called for.Indeed, the majority opinion itself discloses, in the quotation from Merten's Federal Income Taxation, 1948 Supp. § 58.31, the objective of the amending statute and the reason for retroactivity thereof; for it points out that theretofore there had been irritation among taxpayers because the Commissioner, after execution of the waiver, could make additional1948 U.S. Tax Ct. LEXIS 60">79 assessments, after reexamination, but the taxpayer could not, if overpayment was thereby shown, claim refund, so that the 1942 Act provided a claim for refund by the taxpayer during the period of waiver and six months, regardless of other statutes of limitation. It seems to me that Congress did not intend such relief to be 11 T.C. 593">601 limited only to 1942 and later years in the face of the amendment in 1943. A taxpayer, upon reexamination by the respondent during the agreed period of waiver, might find that he had originally paid entirely too much for the year 1941 or some previous year; but under the majority view, if he had so paid more than two years before he appealed for relief (unless claim was within three years from date of return), he would be without remedy, yet if examination showed grounds for assessment the Commissioner could so assess, though without the benefit of section 276 (b) and the waiver thereunder he would not have been able to do so. So it seems to me that a reasonable and liberal construction of these statutes is that, if at any time after the Act of 1943 the Commissioner finds himself able to assess only because he has obtained a waiver under section 2761948 U.S. Tax Ct. LEXIS 60">80 (b), the taxpayer on his part may ask refund within the time set by section 322 (b) (3), and that the mere fact that there had been a previous assessment, not in reliance upon section 276 (b), is immaterial and outside the objectives of the statute.Here there was a waiver under section 276 (b) prior to the assessment made. Assuming, as the majority opinion holds, that such assessment was by virtue of section 272 (d) and therefore not prohibited by section 272 (a) (1), nevertheless, there was, thereafter and up to June 30, 1946, "some time" during which the Commissioner might "assess the tax for such taxable year," i. e., 1941, solely because of the existence of the waiver under 276 (b). The statute is satisfied; liberal interpretation is satisfied when the privilege, in such case, of claiming refund is not limited to two years from date of payment but is, as provided for 1942 and later years, the period of waiver and six months. Reasonable interpretation requires mutuality between the Commissioner and the taxpayer on this matter. Moreover, examination of the Conference Committee Report on the Revenue Act of 1943 (Cumulative Bulletin 1944, p. 1082) with reference to the retroactivity1948 U.S. Tax Ct. LEXIS 60">81 of the amendments of section 169 (c) of the Revenue Act of 1943, after stating that the amendments will not apply to years beginning prior to January 1, 1942, unless the Commissioner would be precluded from making assessments but for the agreement, adds: * * The amendments will, however, be applicable to all taxable years beginning prior to January 1, 1942, if on the date of the enactment of the Revenue Act of 1943, or on some future date, the Commissioner would be barred from making an assessment with respect to such taxable year but for such an agreement. In such case the amendments will be applicable regardless of whether or not the Commissioner actually does make an assessment * * . [Italics added.]I can conceive of nothing more plainly indicative that the assessment actually made by the Commissioner on May 7, 1945, is in the 11 T.C. 593">602 intent of Congress immaterial to the solution of this problem. The majority opinion makes no1948 U.S. Tax Ct. LEXIS 60">82 reference to the committee report, yet the language above quoted therefrom goes to the crux of the majority view, and contradicts it.I would sustain the respondent's motion to dismiss because this taxpayer did not take action within the more liberal rule, both specifically and reasonably applied to taxable years both before and after January 1, 1942. Footnotes1. (a) In General. -- Section 169 (c) of the Revenue Act of 1942 (relating to the effective date of certain amendments to section 322) is amended by inserting at the end thereof the following: "A provision having the effect of the amendment inserting section 322 (b) (3) of the Internal Revenue Code, and a provision having the effect of the amendment made by subsection (b) of this section, shall be deemed to be included in the revenue laws respectively applicable to taxable years beginning after December 31, 1923, but such amendments shall be effective with respect to taxable years beginning prior to January 1, 1942, only if on or at some time after the date of the enactment of the Revenue Act of 1943 the Commissioner may assess the tax for such taxable year solely by reason of having made (either before, on, or after the date of the enactment of the Revenue Act of 1943) an agreement with the taxpayer pursuant to section 276 (b) of the Internal Revenue Code or the corresponding provision of the applicable revenue law to extend beyond the time prescribed in section 275↩ or the corresponding provision of such prior revenue law the date within which the Commissioner may assess the tax.. The amendment appears to have been initiated in the conference report.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620810/	APPEAL OF HARTFORD & CONNECTICUT WESTERN RAILROAD CO.Hartford & C. W. R. Co. v. CommissionerDocket No. 2021.United States Board of Tax Appeals2 B.T.A. 211; 1925 BTA LEXIS 2479; June 30, 1925, Decided Submitted May 27, 1925. 1925 BTA LEXIS 2479">2479 1. Where A corporation owns 99.9 per cent of the stock of B corporation, their interests are closely affiliated, and the relation between B and C corporation by contract applies to A. 2. The relation of lessor and lessee is not sufficient to establish affiliation under section 240, Revenue Act of 1918. 3. Where the lessee owns a majority of the lessor's stock and the minority does not appear or vote at meetings and the lessee by contract is in complete control of all the lessor's business and properties, leaving to the minority stockholder only the right to dividends declared out of rental, the two corporations are affiliated. O. R. Folsom-Jones, Esq., for the taxpayer. Percy S. Crewe, Esq., for the Commissioner. STERNHAGEN 2 B.T.A. 211">212 Before STERNHAGEN, GREEN, and LOVE. The taxpayer appeals from the Commissioner's determination of a deficiency of $826.15 income tax for the calendar year 1918. The Commissioner had held that the taxpayer was not affiliated with The New York, New Haven & Hartford Railroad Co., hereinafter called the New Haven, and that the taxpayer's income included the amount of Federal income tax based upon the taxpayer's1925 BTA LEXIS 2479">2480 income and paid by the New Haven under contract. The facts are not disputed. FINDINGS OF FACT. During 1918 the New Haven owned 17,482 shares out of a total outstanding of 29,670 shares of common stock of the taxpayer, being 58.9 per cent of the total outstanding stock. When the taxpayer's stock books were closed on August 21, 1917, there were 579 shareholders, and on August 21, 1918, there were 570. At the annual stockholders' meeting on June 11, 1917, there were represented 17,525 shares, and on June 10, 1918, there were 17,796. At both these meetings the total 17,482 New Haven shares were represented - more than 99 per cent of the active stock. The corporate officers of the taxpayer were officers of the New Haven and the Central New England Railway Co., hereinafter called the New England, of which the New Haven owned 99.9 per cent of the total outstanding stock. The directors of the taxpayer were officers of the New Haven and the New England. By virtue of a contract, sometimes called a lease, the New England was in possession of and operated the properties of the taxpayer as an integral part of the transportation system of the New Haven. This contract was executed1925 BTA LEXIS 2479">2481 in 1890 with a predecessor of the New England and was ratified by more than two-thirds of the taxpayer's stockholders at that time. By its terms the taxpayer "leased" all its railroad and all its other property, real and personal, of every kind, including its railroad operating income, and excepting its records, account books, and its seal. The term was fifty years. The annual rent was $2 per share of the taxpayer's capital stock at any time outstanding, payable semi-annually on a day certain, and also the interest on bonds of the taxpayer then or thereafter issued. 2 B.T.A. 211">213 And the lessee further covenants with the lessor to pay, during each year of said term, all taxes, rates, charges, and assessments, ordinary and extraordinary, which may be lawfully imposed or assessed in any way upon the lessor or lessee with reference to the premises and property hereby demised, the capital stock of the lessor, its indebtedness, franchises, and revenues, or said rental; said payments to be made to the authority or treasurer entitled by law to receive the same, whether such law be of the United States, the State of Connecticut, or that of any State in which the said railroad is now built1925 BTA LEXIS 2479">2482 or in which said lessor may hereafter build or acquire further lines of railroad, or any municipal corporation of or in said States, so that the said lessor shall be saved harmless, during the continuance of this lease, from any such tax, assessment, or charge under laws or proceedings made or authorized by the United States, or the State of Connecticut, or any other State in which said railroad or its branches or extensions are or may be located; and if any taxes or assessments shall be levied against the individual holders of the stock or bonds of the lessor in lieu of or upon the lessor itself, its railroad and premises, the same shall be paid by the lessee. Provided, That if any of said payments shall not be made within ninety days from the time when the same becomes payable, or if other default be made for ninety days in the performance of any of the covenants of the lessee in this indenture contained, and shall be thereafter continued for ninety days after written notice of such default has been given to it by the lessor, then this lease shall expire and terminate at the option of the lessor, which may re-enter upon the demised premises, and the same have and possess as1925 BTA LEXIS 2479">2483 of its former estate. The lessee was to operate and maintain the property in good condition and so deliver it at the end of the term, subject to a minimum valuation, which the taxpayer might elect to take in cash or railroad equipment. The taxpayer was to pay the lessee for betterments and improvements. The lessee was to indemnify the taxpayer against suits, etc., by reason of the lessee's acts, the lessee was to make any required returns, and the lessee was to fulfill the taxpayer's contracts. The lessee assumed all the taxpayer's floating and unsecured indebtedness. The taxpayer was to keep its corporate organization, and to condemn property at the lessee's request and expense; and similarly to construct new branches and extensions. The taxpayer would comply with the request of the lessee to issue new stock and execute mortgages, and would not do so except with the lessee's consent and at its direction. Thereafter at various times at the request of the New England the taxpayer increased its stock and issued new shares and also acquired land and constructed extensions. In 1919 the New England paid to the United States an amount of $6,884.59 income tax for 1918 upon the1925 BTA LEXIS 2479">2484 net income returned by the taxpayer of $59,371.55. This amount of $6,884.59 was treated by the Commissioner as additional income of the taxpayer in 1918, with the result that he determined the deficiency in question of $826.15. 2 B.T.A. 211">214 It is stipulated that if the taxpayer and the New Haven are affiliated there is no deficiency. DECISION. The deficiency determined by the Commissioner is disallowed. OPINION. STERNHAGEN: The question first to be determined is whether the taxpayer was affiliated with the New Haven, that is, whether the New Haven owned directly or controlled through closely affiliated interests substantially all the stock of the taxpayer. It owned directly 58.9 per cent of the shares. It owned 99.9 per cent of the stock of the New England, and hence it can not be doubted that the New England was a closely affiliated interest of the New Haven. Whatever relation existed between the New England and the taxpayer may therefore the be properly treated for the purposes of this statute as applying to the New Haven. The question thus becomes one to determine whether the contract of 1890 and the ownership of 17,482 shares, together with the other facts found, 1925 BTA LEXIS 2479">2485 bring the two corporations into the statutory affiliation. The contracts is not a mere lease by which a lessor lets its property to a lessee for a rental. It is a virtual relinquishment by the taxpayer to the New Haven of its rights and powers as a subsisting business institution and places the New Haven in control of its destiny. Not only does the New Haven possess and operate the properties, it also may require the taxpayer to acquire more property and to mortgage them as the New Haven directs. All of the taxpayer's railroad business is out of its hands, including its operating income; and whatever franchies it acquired have been placed at the New Haven's disposal. That under these circumstances the New Haven actually controls the business and properties of the taxpayer is plain to be seen. But it is said that this alone is not enough to bring the statute into operation, because the control of the business and properties is not the control of substantially all the stock. And it is true that in many cases the two are distinct. It does not follow from a lease of the entire properties of a corporation that the lessee can be said to control the stock. 1925 BTA LEXIS 2479">2486 . There must be substantially more. Certainly there must be a common interest above that of the ordinary lessor in his rent and the preservation of his property. In the present case, however, it is contended that the existence of a substantial minority of outstanding stock should defeat affiliation. It is not shown that by any act such minority has or could frustrate any purpose or plan of the New 2 B.T.A. 211">215 Haven, but, on the contrary, the insignificant number of minority shares which voted at the stockholders' meetings in 1917 and 1918 indicates an unobstructed control by the New Haven. Whatever the New Haven requested was done. And how could it be otherwise? The New Haven had the property and it also held sufficient votes to overcome any opposition to its management. Although theoretically the lessor had the right to enforce the terms of the lease and demand forfeiture or other remedy in default of any of the covenants, how was this to be accomplished if the New Haven resisted? Its officers controlled the properties and management, both as officers and directors of the taxpayer, and its majority of shares was behind1925 BTA LEXIS 2479">2487 these directors. The sum total of the affairs of the taxpayer was therefore in the hands of the New Haven. All that the shares of stock represented to the minority holders was the right to receive dividends on their stock. And it may be questioned how that right was to be preserved in the event of financial failure of the New Haven. Even a minority stockholders' proceeding would hardly be adequate where the effectiveness of the business depends on its relation to the larger transportation system of which it is a part. When one corporation so far controls the property and affairs of the other as to leave in the minority stockholders nothing but a bare interest in a division of the rental, it is quibbling to say that the minority stock is not controlled. We must conclude that the New Haven owned directly or controlled substantially all the stock of the taxpayer, and that they were affiliated within the meaning of the statute. Both parties refer to the decision of the Board in the , but the circumstances there were substantially different. There the lessee owned less than a majority of the lessor's stock and the1925 BTA LEXIS 2479">2488 other facts were not sufficient to indicate control. Deciding as we do that the two corporations were affiliated, thus requiring a consolidated return, the second question disappears, for the payment by one of the tax of the other is an intercompany transaction and does not affect income. In view of the stipulation of the parties, the entire deficiency is disallowed.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620811/	H. H. BOWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. WILLIAM BOWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bowman v. CommissionerDockets Nos. 15850, 18935.United States Board of Tax Appeals16 B.T.A. 1157; 1929 BTA LEXIS 2435; June 27, 1929, Promulgated 1929 BTA LEXIS 2435">2435 1. Expenses of a department store in holding annual picnic for employees held to be ordinary and necessary expenses of conducting the business. 2. Contributions to a trustee to provide a fund for distribution among various classes of corporations or to a certain community chest held deductible under the Revenue Act of 1921, but not under the Revenue Act of 1918. Paul G. Smith, Esq., for the petitioners. Bruce A. Low, Esq., for the respondent. MURDOCK 16 B.T.A. 1157">1158 The Commissioner determined deficiencies as follows: Calendar yearsH. H. BowmanJ. William Bowman1920$3,662.90$1,993.0219212,387.972,465.901922943.071,864.111923454.56NoneBoth petitioners attacked these determinations on the ground that, in computing their distributive shares of the net income of a partnership of which they were members, the Commissioner disallowed expenses of an annual picnic given by the partnership for its employees. Each petitioner also alleged an error relating to the year 1924, for which year we dismissed the proceedings for lack of jurisdiction. J. W. Bowman alleged as an additional error the disallowance1929 BTA LEXIS 2435">2436 of deductions for contributions made to the trustee of a fund the income of which was to be used only for religious, charitable, scientific or educational purposes. FINDINGS OF FACT. The petitioners are and were during all the taxable years members of the partnership of Bowman & Co., which conducted a department store in Harrisburg, Pa. They each had a 40 per cent interest in this partnership. The partnership paid or accrued on its books as welfare expenses or advertising on account of picnics given for its employeesThe following total amounts for the following years: Fiscal year ended January 31 - 1920$1,156.7119211,361.0119221,638.4019232,222.49In the determination of the deficiencies these amounts have not been allowed as deductions from the gross income of the partnership. For a number of years preceding the taxable years the partnership had given and during each of the years before us it gave a picnic for its employees. These picnics took place on some day during the summer. On that day the store would be closed all day. The picnics were held at the Bowman country residence. The services of the 16 B.T.A. 1157">1159 employees for the full1929 BTA LEXIS 2435">2437 day, the cost of transporting them to and from the picnic grounds, the cost of feeding and amusing them while at the picnic, and all other expenses incident thereto, were paid by the partnership. The partnership obtained considerable desirable publicity from the picnics. The fact that a picnic was to be held at a certain date was advertised in the store, in newspapers and elsewhere, and with it the fact was also advertised that the store would be closed on the day of the picnic. On the day of the picnic the employees of the store usually marched through some part of the City of Harrisburg preceded by a band. Pictures and motion pictures of the picnic were taken and were later displayed in the store and in the motion picture houses in Harrisburg. The managers of the store considered the picnic a desirable and profitable form of publicity and the means of attracting favorable attention to the store. They held it as a part of their plan to obtain publicity for the store and to attract attention to the store. They also used it as a means of maintaining proper morale among their employees. In the opinion of the managers of the store, its sales increased satisfactorily in relation1929 BTA LEXIS 2435">2438 to the amount expended for advertising and publicity of one kind and another. Competing stores in Harrisburg were at that time giving similar picnics. The expenses of the picnic for each year were ordinary and necessary expenses paid or incurred during the taxable year in carrying on the trade or business of the partnership. On April 20, 1920, J. William Bowman, made, executed, signed, acknowledged and delivered a deed of trust in the following terms to the Harrisburg Trust Co., a corporation doing a general banking business, which company by its proper officers, duly accepted the trust: THIS DEED OF TRUST, Made the 20th day of April, A.D. 1920. WITNESSETH, That I, J. William Bowman, of the City of Harrisburg, County of Dauphin, Pennsylvania, do hereby give to the Harrisburg Trust Company, a corporation of the State of Pennsylvania, the sum of One Dollar ($1.00) and such other and additional money, property and gifts as I may hereafter, and from time to time designate, set aside or otherwise add thereto, IN TRUST, to be held, managed and distributed by it for charitable purposes, upon the following terms and conditions: 1. The fund thus created, and to be created, shall1929 BTA LEXIS 2435">2439 be designated and called "THE J. WILLIAM BOWMAN CHARITABLE TRUST." 2. It shall be kept separate from any and all other trusts or funds, except those expressly added to become a part thereof. 3. The Donor, J. William Bowman, his wife, Frances Marion Bowman, and, as they severally become of legal age, their children, shall constitute, with the Trustee, a committee to direct the management, investment and disbursement of the fund and gifts made therefrom for the charitable purposes hereinafter designated. 16 B.T.A. 1157">1160 Upon the death, resignation or inability of any member of the Committee to act, the survivors shall succeed to their powers and duties, and such survivors shall elect their successors from among the lineal descendents of J. William Bowman and Frances Marion Bowman, so as at all times to maintain a Committee of not less than two nor more than six active members, including the Harrisburg Trust Company. In the event that there should be a failure of lineal descendents of the said J. William Bowman and Frances Marion Bowman, his wife, qualified to act as members of the Committee, as herein provided, then the Harrisburg Trust Company is designated as the Trustee, or1929 BTA LEXIS 2435">2440 Custodian of this fund, to be administered as part of the Harrisburg Foundation, but only for the purposes hereinafter expressed. 4. The Trustee shall hold, invest, reinvest and manage the fund hereby created, with full powers, and with authority to purchase and sell real estate, according to its best judgment, and without being limited in its discretion as to the character of investments to be made, and shall distribute the income and make gifts for the charitable purposes hereinafter expressed, subject only to the advice and direction of the Committee hereinbefore established, of which the Trustee is a member. In case of the inability of the Committee to reach an agreement upon any matter, by reason of an equal division among its members in a tie vote, then and in such event the Trustee shall have the power to decide the matter by casting two votes upon such question; and provided that whenever the principal of the said fund shall exceed the sum of Fifty Thousand Dollars, not more than a one-tenth part thereof shall be invested in any single security. 5. The purposes of this gift and foundation are to benefit, consistently with existing laws, the people of the City of1929 BTA LEXIS 2435">2441 Harrisburg, or of the Commonwealth of Pennsylvania, either by bringing their minds and hearts under the influence of education, or of the Christian religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or aiding those stricken by public calamity, and to that end the Trustee may distribute, as it may appear to be wise, and as directed by the Committee, any part or all of the income derived from the fund hereby established, by making gifts or contributions to corporations or associations organized and operated exclusively for religious, charitable, scientific or educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual. If, in any year, the whole of the income of the fund shall not be so distributed, the balance remaining may, at the discretion of the Trustee and the Committee, be added to and become a part of the principal of the said fund or be distributed in a subsequent year. 6. No part of the fund, or the income therefrom shall be spent for any other purpose than those herein designated, except that from the income there shall be defrayed the1929 BTA LEXIS 2435">2442 necessary expenses of the administration of the trust hereby created, and such proper and usual charge as may be allowed by the Committee to the Harrisburg Trust Company for its services as Trustee. 7. If the express purpose of this trust, or any part thereof, shall fail, or be forbidden by law, or otherwise become impossible of accomplishment, the fund hereby created shall be so administered as to fullfill as nearly as may be the aims and purposes of its creation under the direction of the court of proper jurisdiction. 8. As to any matter of detail or management and operation, but not in any matter affecting the purpose of this foundation, or the application of the income thereof, the terms and conditions of this Deed of Trust may be changed at any time by unanimous agreement of the Trustee and the Committee, such 16 B.T.A. 1157">1161 unanimous agreement having been reduced to writing and evidenced by the signature of the Trustee and each member of the Committee. 9. If at any time it shall be deemed advisable by the Committee, the fund herein established may be committed to the Harrisburg Foundation for administration, but only for the purposes hereinbefore set forth, such decision1929 BTA LEXIS 2435">2443 by the Committee to be evidenced by a written direction to that effect, to be filed with the Harrisburg Trust Company. IN WITNESS WHEREOF, I have hereunto set my hand and seal at Harrisburg, Pennsylvania, the day and year first above written. The Harrisburg Foundation is a community chest. J. William Bowman had, prior to the execution of the trust agreement, made certain contributions of a charitable nature. His purpose in creating the trust was to provide for the continuation of contributions of this character after his death. In June, 1920, he took out two policies of insurance on his own life in the total amount of $50,000, in which the beneficiary was "Harrisburg Trust Company, Incorporated under the laws of the State of Pennsylvania under deed of trust dated April 20, 1920." In December, 1920, he took out an additional policy of insurance in the amount of $50,000 on his life, naming the same beneficiary. In none of these policies did he reserve the right to revoke or change the beneficiary. In 1920 he turned over these policies to the Harrisburg Trust Co., which has continued to hold them. In each of the taxable years J. W. Bowman contributed to the trust an amount1929 BTA LEXIS 2435">2444 as set forth below, which amount was approximately the amount necessary to pay the premiums on the three policies of insurance just mentioned: Year:Amount1920$4,50019213,50019222,000The Harrisburg Trust Co. opened an account upon its books under the title of "The J. William Bowman Charitable Trust". This account contains entries for the calendar years in question showing receipt during the taxable years of the amounts contributed by J. William Bowman, and shows as the only expenditures for the taxable years the payment of the premiums on the three policies of insurance aforesaid. In the determination of the deficiencies in question, the Commissioner did not allow the deduction of any of the amounts above set forth. OPINION. MURDOCK: The respondent defends as to the first issue, only on the broad ground that picnic expenses can not be considered ordinary 16 B.T.A. 1157">1162 and necessary expenses. We think that it has been sufficiently demonstrated in this case that they were ordinary and necessary expenses of carrying on the department store business of the partnership. 1929 BTA LEXIS 2435">2445 ; ; ; ; ; ; ; . The partnership net income should be redetermined by allowing this deduction and the distributive shares of the petitioners redetermined accordingly. The petitioner J. W. Bowman claims the right to deduct the amounts which he contributed to the trust which he established in his name. For the year 1920 he claims this right under section 214(a)(11) of the Revenue Act of 1918, which is in part as follows: (a) That in computing net income there shall be allowed as deductions: * * * (11) Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of1929 BTA LEXIS 2435">2446 which inures to the benefit of any private stockholder or individual * . For the years 1921 and 1922 he claims this right under section 214(a)(11) of the Revenue Act of 1921, which is in part as follows: (a) That in computing net income there shall be allowed as deductions: * * (11) Contributions or gifts made within the taxable year to or for the use of: * * * (B) any corporation, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, including posts of the American Legion or the women's auxiliary units thereof, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; * * . This is the first case of its kind which has ever come to our attention. We know of no decided case involving an alleged contribution to a trust for the use of charitable and the other organizations as a class. In , we decided that the petitioner therein was not entitled to deduct premiums paid on a policy of life insurance on his own life where he had1929 BTA LEXIS 2435">2447 named as beneficiary certain religious and charitable corporations but had retained the right to change the beneficiary. The present case, however, is distinguishable from the Adler case, for here the petitioner did not reserve the right to change the beneficiary. The wording of the part of the 1918 Act above set forth differs materially from that of the Revenue Act of 1921. In the former 16 B.T.A. 1157">1163 Act Congress has limited the deduction to contributions or gifts made to corporations, as defined in the statute, while in the latter Act it has used the words "or for the use of" and also the words "or community chest, fund, or foundation." It is obvious that these additional words used in the later Act allow the deduction of contributions which were formerly not allowed. The gifts here in question were not made to a corporation organized and operated exclusively for religious, charitable, scientific or educational purposes or for the prevention of cruelty to animals. They were not made to a corporation at all but on the contrary were made to a trustee, and they might go to a community chest. It follows, therefore, that the petitioner is not entitled to deduct any part of1929 BTA LEXIS 2435">2448 the $4,500 which he contributed to the trust in 1920. . The situation under the Revenue Act of 1921 is different. It is true that in almost every case that has come before this Board involving contributions, the contributions in question have been made to some specifically named recipient. However, we find nothing in the Revenue Act of 1921 requiring the naming of any particular recipient, but on the contrary the language employed by Congress in this Act in our opinion permits the deduction of contributions made for the use of any one or all of a class consisting for example of the churches, the hospitals, or the children's homes situated in any part of the United States, no part of the net earnings of which inures to the benefit of any private stockholder or individual. If the petitioner in this case had established a trust similar to the one which he did establish and had provided therein that the trustee should distribute the income and/or the corpus of the trust to any one or more of the churches in Harrisburg organized and operated exclusively for religious purposes, no part of the net earnings of which inured to the1929 BTA LEXIS 2435">2449 benefit of any private stockholder or individual and during each of the taxable years had contributed $5,000 to this trust, this amount would be a contribution within the meaning of the Revenue Act. Furthermore, if he sees fit to extend the class which may benefit by his gift and, in extending the class, uses the very words of the Revenue Acts to include corporations or associations organized and operated exclusively for religious, charitable, scientific and educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual, we see no reason why he should be any the less entitled to deduct from his income the amount which he contributed in any year. Cf. ; . Paragraph 9 of the deed of trust provides that the fund may be turned over to the Harrisburg Foundation for administration, but only for the purposes theretofore 16 B.T.A. 1157">1164 set forth in the deed of trust. This foundation is a community chest. In this provision of the trust instrument there would be no bar to the right of the petitioner to deduct the amount contributed, 1929 BTA LEXIS 2435">*2450 subject to the 15 per cent limitation. The petitioner definitely parted with the money which he gave to the trust and thereafter he had no equitable nor legal claim to the amount. The beneficiaries under the trust are, of course, somewhat uncertain, but they are limited to a class. It is also true that during the taxable years no one in the class received any benefit from the amounts contributed by the petitioner to the trust. However, no one outside the class can ever benefit by the contribution and machinery was set in motion whereby in all likelihood some member of the class would benefit. In our opinion this was the sort of thing that Congress intended to encourage, and under the 1921 Act, or for the years 1921 and 1922, the petitioner is entitled to deduct as contributions, subject to the 15 per cent limitation, the amounts which he gave to the trust, namely, $3,500 and $2,000. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620812/	Fred P. Pursell and Helen Pursell, Petitioners, v. Commissioner of Internal Revenue, RespondentPursell v. CommissionerDocket No. 86587United States Tax Court38 T.C. 263; 1962 U.S. Tax Ct. LEXIS 135; May 15, 1962, Filed 1962 U.S. Tax Ct. LEXIS 135">135 Decision will be entered for the respondent. Petitioners kept their books and records on the accrual basis, which clearly reflected their income. For the calendar years 1950-1953 petitioners reported and computed their income on their tax returns on the cash basis, without using inventories, receivables, or payables. On their tax returns for 1954 and subsequent years petitioners reported and computed their income on the accrual basis consistent with their books and records. Respondent adjusted petitioners' income for 1954 and subsequent years by adding back to income opening inventories and accounts receivable and deducting accounts payable as of December 31, 1953. Held:1. Petitioners changed their method of accounting in 1954 within the meaning of section 481 of the 1954 Code.2. Petitioners initiated the change in method of accounting within the meaning of section 481(a)(2) of the 1954 Code, as amended by section 29 of the Technical Amendments Act of 1958.3. Respondent correctly computed the transitional adjustments authorized by section 481(a) of the 1954 Code.4. Section 29 of the Technical Amendments Act of 1958 is not unconstitutional.5. Assessment and collection1962 U.S. Tax Ct. LEXIS 135">136 of income tax for 1954 is not barred by the statute of limitations. Waivers effective to keep statute open. L. E. Renard, Esq., for the petitioners.Albert Squire, Esq., for the respondent. Drennen, Judge. DRENNEN38 T.C. 263">263 Respondent determined deficiencies in income tax due from petitioners for the taxable years and in the amounts as follows:YearAmounts1954$ 12,456.24195510,687.5519569,696.0919578,092.59195810,640.5138 T.C. 263">264 The issues for decision are:(1) Whether petitioners changed their method of accounting in 1954 within the meaning of section 481 of the Internal Revenue Code of 1954. 1(2) Whether section 29 of the Technical Amendments Act of 1958, which amended section 481 of the Internal Revenue Code, is constitutional. 1962 U.S. Tax Ct. LEXIS 135">138 (3) If petitioners changed their method of accounting in 1954, whether they initiated the change within the meaning of section 481(a)(2) of the 1954 Code, as amended by the Technical Amendments Act of 1958.(4) Whether respondent has correctly computed the transitional adjustments authorized by section 481(a) by adding to income for 1954 the amount of Fred P. Pursell's (hereinafter referred to as Fred) inventory and accounts receivable at December 31, 1953, and by deducting from taxable income the amount of Fred's accounts payable at December 31, 1953.(5) Whether the assessment and collection of income tax for the year 1954 is barred by the statute of limitations.FINDINGS OF FACT.Some of the facts have been stipulated and are found as stipulated.Petitioners at all times material hereto have been husband and wife residing in Clarks Green, Pennsylvania. They filed timely1962 U.S. Tax Ct. LEXIS 135">139 joint Federal income tax returns with the district director of internal revenue at Scranton, Pennsylvania, for each of the years 1954 through 1958 and reported on the basis of a calendar year. 2 Their return for 1954 was filed on April 14, 1955.In about 1933, Fred started in business for himself in the wholesale radio and electronics business. During the taxable years here involved, Fred was engaged in the business of selling at wholesale radio, electronic, and television equipment.From at least the year 1946 through 1958, the selling of merchandise was an income-producing factor in Fred's business, and it was necessary to use inventory to clearly reflect income for these years. The accrual method, at least for purchases and sales, with inventories, was necessary to clearly reflect income from Fred's business for these years.Since at least January 1, 1949, Fred1962 U.S. Tax Ct. LEXIS 135">140 has maintained a double entry set of books on an accrual method of accounting.For the taxable years 1950 through 1953, petitioners reported their income on their tax returns on the cash receipts and disbursements 38 T.C. 263">265 method of accounting, without using or showing any opening or closing inventories.For the taxable years 1954 to 1958, inclusive, petitioners computed their taxable income on their income tax returns on an accrual method of accounting, in accordance with Fred's books. Cost of goods sold on these returns was computed with the use of opening and closing inventories.At the close of business December 31, 1953, Fred had accounts receivable of $ 166,057.20. The sales represented by these accounts receivable were not reported as income in Fred's returns for years prior to 1954, when such sales were made. Nor were they reported as income in Fred's returns subsequent to 1953 to the extent collections were made on these accounts receivable.At the close of business December 31, 1953, Fred had accounts payable of $ 82,309.52. The purchases of merchandise represented by these accounts payable were not deducted on Fred's return for 1953 when such purchases were made, nor1962 U.S. Tax Ct. LEXIS 135">141 in 1954, when the accounts payable were paid.Fred's inventory at the close of business December 31, 1953, was $ 93,935.59.Petitioners' income tax returns for years prior to 1953 have been destroyed under respondent's program for destruction of old records.The retained copies of petitioners' returns for the years 1937 to 1949 show the following opening and closing inventories:YearOpeningClosing1937$ 7,340.15$ 6,603.2819386,603.286,216.1119396,216.116,965.0919406,965.094,784.961941(1) (1) 1942(1) (1) 19436,739.134,852.3019444,852.3010,030.25194510,030.2513,284.46194613,284.4624,018.00194724,018.0027,420.60194827,420.6030,673.03194930,673.0334,017.51Fred's books and records show the following accounts receivable (net after reserve for bad debts), merchandise inventory, and accounts payable as of December 31 of the following years:YearAccountsInventoryAccountsreceivablepayable1946$ 19,176.13$ 24,018.00$ 14,633.50194717,714.2627,420.6013,263.91194819,039.8330,673.032,926.32194931,065.5534,017.5112,182.91195050,616.9523,838.1610,142.32195181,860.8061,123.0738,164.491952140,100.4364,754.377,763.661953166,057.2093,935.5982,309.521962 U.S. Tax Ct. LEXIS 135">142 38 T.C. 263">266 For the taxable year 1947, a deputy collector, as examining officer, audited Fred's returns. He found that Fred reported income by the cash method for 1947 except that Fred used inventories. He further determined that Fred included in both opening and closing inventories for 1947 merchandise for which he had not paid. The examining officer decided Fred's inventories should not include merchandise for which he had not paid, and determined that accounts payable with respect to inventory at December 31, 1946, and at December 31, 1947, were in the respective amounts of $ 14,961.63 and $ 11,829. He adjusted income for 1947 by adding to income the amount of the decrease in accounts payable with respect to merchandise between the first and the last days of 1947.On December 4, 1957, petitioners and a delegate of the Secretary of the Treasury, acting on behalf of respondent, executed a Form 872 entitled "Consent Fixing Period Of Limitation Upon Assessment Of Income And Profits Tax" in which they agreed:That the amount of any income, excess-profits, or war-profits taxes due under any return (or returns) made by or on behalf of the above-named taxpayer (or taxpayers) for the 1962 U.S. Tax Ct. LEXIS 135">143 taxable year ended December 31, 1954, under existing acts, or under prior revenue acts, may be assessed at any time on or before June 30, 1959, except that, if a notice of deficiency in tax is sent to said taxpayer (or taxpayers) by registered mail on or before said date, then the time for making any assessment as aforesaid shall be extended beyond the said date by the number of days during which the making of an assessment is prohibited and for sixty days thereafter.On December 9, 1958, petitioners executed another Form 872 in which they agreed as they had in the first consent, except that the time for assessing any income tax due for the taxable year ended December 31, 1954, was stated to expire on June 30, 1960.The notice of deficiency herein was dated February 24, 1960.ULTIMATE FINDINGS.Fred initiated a change in his method of accounting in 1954, the year of change, within the meaning of section 481, as amended by the Technical Amendments Act of 1958.Those adjustments which are necessary solely by reason of Fred's change, in order to prevent amounts from being duplicated or omitted, are the addition to income of the amounts of inventory and accounts receivable as such amounts1962 U.S. Tax Ct. LEXIS 135">144 appeared on Fred's books at December 31, 1953, and the deduction from taxable income of the amount of accounts payable as such amount appeared on Fred's books at December 31, 1953.OPINION.Fred, for 1954 and for prior taxable years, maintained the books and records of his business on the accrual method of accounting. 38 T.C. 263">267 It is undisputed that such method was proper. However, for 3 years prior to 1954 he reported and computed income for Federal tax purposes strictly by the cash method. In 1954, without first requesting permission of, or being required to by, the Commissioner, he changed his method of reporting and computing his income for tax purposes to the accrual method, in conformity with his method of bookkeeping.On his 1954 return Fred computed cost of goods sold by using a beginning inventory of $ 93,935.59. In computing gross receipts he did not take into consideration collections in 1954 on accounts receivable which he had at January 1, 1954, in the amount of $ 166,057.20, and in computing deductions he did not take into consideration payments in 1954 on accounts payable on his books at the beginning of 1954 in the amount of $ 82,309.52. The amounts of these items1962 U.S. Tax Ct. LEXIS 135">145 are not in dispute. This treatment would not ordinarily be subject to objection under rules of computing net income by the accrual method, but because 1954 marked Fred's changeover from the cash to the accrual method of reporting income, the treatment accorded the items in 1954 would mean that Fred would get the benefit of a deduction in 1954 representing opening inventory which he had presumably paid for and deducted in years prior to 1954. It would also mean that amounts received on accounts receivable at January 1, 1954, would never be included in income and that Fred would never receive the benefit of a deduction for payments made on accounts payable at January 1, 1954.Respondent has determined deficiencies for the taxable years 1954 through 1958 on the grounds that, under section 481(a), I.R.C. 1954, 3 in computing Fred's taxable income for 1954 -- a year of change in the method under which Fred's taxable income was computed -- there must be taken into account those adjustments which are necessary solely by reason of Fred's change of method in order to prevent amounts from being duplicated or omitted. The adjustments authorized by section 481(a), according to respondent's1962 U.S. Tax Ct. LEXIS 135">146 determination, are the addition to reported income for 1954 of $ 259,992.79, representing the sum of Fred's inventory and accounts receivable at January 1, 1954, and the allowance of a deduction amounting to $ 82,309.52, representing 38 T.C. 263">268 accounts payable at January 1, 1954. The net result is the addition to income of $ 177,683.27.1962 U.S. Tax Ct. LEXIS 135">147 Further, respondent has determined that one-tenth of the amount of this net adjustment, or $ 17,768.33, constitutes additional income in each of the taxable years 1954-1958. 4 This determination has been made in accordance with the provisions of section 481(b)(4)(B), added to the Code by section 29 of the Technical Amendments Act of 1958, 5 according to respondent's argument.1962 U.S. Tax Ct. LEXIS 135">148 Petitioners advance several arguments to support their allegations of error in respondent's determination.First, petitioners contend that Fred at no time changed his accounting method for the keeping of his books, and that, consequently, section 481(a) as amended by the Technical Amendments Act of 1958 has no application to the facts of this case. They rely on the case of Robert G. Frame, 16 T.C. 600">16 T.C. 600 (1951), affirmed per curiam 195 F.2d 166 (C.A. 3, 1952), for the proposition that adjustments such as respondent proposes in this proceeding cannot be made in the year of change from a cash to an accrual method of reporting income when that change is not accompanied by a change in the method of bookkeeping, and their argument is buttressed by other authorities, all decided under the Internal Revenue Code of 1939 before the enactment of section 481 in the Code of 1954. Petitioners say that section 481 applies only in those instances in which the taxpayer changes his method of bookkeeping.38 T.C. 263">269 We disagree with petitioners on this point. Changes by taxpayers in their methods of computing income have given rise to1962 U.S. Tax Ct. LEXIS 135">149 difficult problems in the past, and these problems have been particularly apparent in the situation where a taxpayer changes his method -- for whatever reason -- from the cash to the accrual method. Such a situation has caused litigation since at least the case of John G. Barbas, 1 B.T.A. 589">1 B.T.A. 589 (1925). The cases involving that litigation have only historical significance in this proceeding because this case arises under section 481 of the 1954 Code which had no counterpart in the 1939 Code. See Southeast Equipment Corporation, 33 T.C. 702">33 T.C. 702 (1960), affd. 289 F.2d 493 (C.A. 6, 1961). 61962 U.S. Tax Ct. LEXIS 135">151 The questions here must be decided under section 481 as enacted. We think it is clear from the express language used by Congress, particularly when viewed in the light of the confusion in the law existing at the time this legislation was being considered and its legislative history, that application of the section is not limited to those cases in which the taxpayer changes his method of keeping his books, but applies in any case wherein the method of accounting employed in computing taxpayer's taxable income for1962 U.S. Tax Ct. LEXIS 135">150 a particular year is different from the method of accounting employed in computing the taxpayer's income for the preceding taxable year, whether or not such change is accompanied by a change in the method of accounting employed in keeping taxpayer's books. We think the provisions of section 481(a) were intended to, and do, dispense generally with those distinctions which were developed by the courts dealing with the problem of a change from the cash to the accrual method under the 1939 Code. 7Section 481(a) sets forth the general rule applicable in cases in which, in the year of change, the taxpayer's taxable income is computed "under a method of accounting different from the method under 38 T.C. 263">270 which the taxpayer's taxable income for the preceding taxable year was computed." (Emphasis supplied.) The term "taxable income" for purposes of the Code of 1954 is given a definite meaning under section 63(a); it signifies net income for income tax purposes, not for accounting purposes generally. Therefore, it seems clear that section 481(a) applies, by its express terms, to situations where1962 U.S. Tax Ct. LEXIS 135">152 there is a change in the method of computing income for tax purposes; that is, for purposes of reporting income.The difference between computing income generally and computing taxable income for income tax purposes is also pointed up in section 446(e), the provisions of which deal with obtaining consent of the Secretary of the Treasury for a change in computing taxable income after a change in "the method of accounting on the basis of which [the taxpayer] regularly computes his income in keeping his books." (Emphasis supplied.) Also, section 446(a) provides that "Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." (Emphasis supplied.)Section 481(a) as it appeared in the original bill adopted by the House of Representatives 8 was the same as in the present law down to subparagraph (2) which read as follows:(2) there shall be taken into account those adjustments which are determined, by the Secretary or his delegate, to be necessary solely by reason of the change in order to prevent amounts from being duplicated or entirely omitted.The Senate 9 amended subparagraph1962 U.S. Tax Ct. LEXIS 135">153 (2) to read as follows:(2) there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted, except there shall not be taken into account any adjustments in respect of any taxable year to which this subtitle does not apply.The Senate version was adopted as a part of the original 1954 Code.The proposed effect of section 481, as it was enacted in the 1954 Code, is explained in the following statement by the Senate Finance Committee:If there is a change in the method of accounting employed in computing taxable income from the method employed for the preceding taxable year, adjustments must be made in order that every item of gross income or deduction is taken into account and that none are omitted. At the same time no item is to affect the computation of taxable 1962 U.S. Tax Ct. LEXIS 135">154 income more than once. It is only those omissions or doubling ups which are due to the change in method which must be adjusted.Under present law these adjustments are made whenever the taxpayer requests permission to change his method of accounting. Where the Commissioner forces a taxpayer to change his method of accounting because the old method does not clearly reflect income, various court decisions have denied the Commissioner the right to make the necessary adjustments.38 T.C. 263">271 Under the House bill for taxable years beginning after December 31, 1953, if the taxpayer changes his method of accounting, voluntarily or involuntarily, adjustments will be made in the year of the change. Under your committee's amendments no part of the transitional adjustments will be based on items that were, or should have been, under the proper method of accounting, taken into account as an income-producing factor for taxable years to which subtitle A of the 1954 Code does not apply. It is contemplated that such transitional adjustments as are required will take into account inventories, accounts receivable, and accounts payable, but that they should not be limited to those categories. If the1962 U.S. Tax Ct. LEXIS 135">155 adjustments increase the taxable income by more than $ 3,000, the tax attributable to the adjustment shall not exceed the tax which would have resulted if the adjustment had been included ratably in the taxable year of the change and the 2 preceding taxable years. This special limitation only applies if the taxpayer used the old method in the 2 preceding taxable years. [S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., pp. 307, 308 (1954).]The general purpose of the original section 481 seems obvious. It was to prevent income from escaping tax altogether and to prevent double taxation of income where such escape or doubling up resulted solely from a change in method of computing taxable income, regardless of why the change was made and whether it was made by the taxpayer or the Commissioner. The emphasis was on taxing all income, but only once, and the barriers to that objective raised by the courts in litigation under the 1939 Code were eliminated. The broad language used indicates that the lawmakers meant to provide a working rule, definitive in its application, which would deal with problems which, in the absence of a statutory guide, had proved1962 U.S. Tax Ct. LEXIS 135">156 troublesome to the courts. The only tests were to be whether the adjustment would prevent income from being duplicated or omitted, and whether the adjustment was made necessary solely by reason of the change in method of computing taxable income. The Senate retained the same general purpose but limited the adjustments to those with respect to taxable years beginning with 1954.We hold that section 481(a) applies where there is a change in the method of accounting employed in computing taxpayer's taxable income and is not limited in application to those situations wherein there has also been a change in the method of accounting employed in keeping taxpayer's books.The adjustments which respondent has proposed herein are clearly necessary solely by reason of Fred's change of method of computing taxable income in order to prevent amounts from being duplicated or omitted, and petitioners do not contend otherwise. But they are adjustments with respect to a taxable year prior to 1954 based on items that were, or should have been, under a proper method of computing taxable income, taken into account as an income-producing factor in prior years, and we would be constrained to hold, were1962 U.S. Tax Ct. LEXIS 135">157 it not for the amendment of section 481 by section 29 of the Technical Amendments Act of 1958, that the proposed adjustments could not be made. See 38 T.C. 263">272 secs. 1.481-2(d) and 1.481-4(e), Income Tax Regs., and 33 T.C. 702">Southeast Equipment Corporation, supra. However, that amendment added the last clause to the present section 481(a)(2) of the Code which retroactively permitted adjustments with respect to years prior to 1954 to be made if the adjustment "is attributable to a change in the method of accounting initiated by the taxpayer." We think the quoted language, which refers only to "method of accounting" and not to method of accounting under which taxpayer's taxable income is computed, must be read in the context of the entire section of which it is a part, and when so read it applies to a change in the method of computing taxable income initiated by the taxpayer.Petitioners contend, but do not press the argument on brief, that because of its retroactive effect, section 29 of the Technical Amendments Act of 1958 is unconstitutional. The constitutionality of that section was put in issue in 33 T.C. 702">Southeast Equipment Corporation, supra,1962 U.S. Tax Ct. LEXIS 135">158 and this Court and the Court of Appeals on review found the section was not unconstitutional, as we do now on the authority of that case.Petitioners next contend that, even if Fred did change his method of accounting for purposes of section 481, he did not initiate the change and pre-1954 adjustments cannot be made. They say that for 1954 he merely complied with the requirement of section 446(a)10 and reported in accordance with his books, and that the change was initiated by a legal requirement.The legislative comments concerning section 29 of the Technical Amendments Act of 1958 do not contain a definition of "initiate" but the explanation of the House Ways and Means Committee 11 offers the following background:Generally, under the 1939 Code taxpayers who requested permission to change1962 U.S. Tax Ct. LEXIS 135">159 their method of accounting were required to make certain adjustments, in the year of change, to prevent income or expenses from being included or deducted more than once, or to prevent their omission entirely. However, where the Internal Revenue Service had required taxpayers to change their method of accounting, the courts generally did not require these adjustments to be made. Where the adjustments were made, the "bunching" of income which occurred in the taxable year of change frequently resulted in an especially heavy tax burden.Section 481 of the 1954 Code for the first time provided statutory rules with respect to these adjustments. This section requires these adjustments to be made in full to the extent that they are attributable to 1954 or a subsequent year. However, no adjustments are required which are attributable to years before the application of the 1954 Code.Your1962 U.S. Tax Ct. LEXIS 135">160 committee sees no reason why the pre-1954 Code year adjustments should not be made, when taxpayers, of their own volition, have changed their method 38 T.C. 263">273 of accounting. This was, in fact, generally the practice under the 1939 Code. Your committee recognizes, however, the need to prevent the "bunching" of taxable income in these cases. This was recognized in practice under the 1939 Code when, administratively, provision was made for the spreading of some adjustments over a long period of time.This bill does not affect present law with respect to pre-1954 adjustments where the change in method of accounting is not initiated by the taxpayer. Where the change is initiated by the taxpayer, the adjustments, to the extent attributable to years before 1954, must be made in computing taxable income, but they may spread over a period of as much as 10 years.Changes in methods of accounting initiated by the taxpayer include a change in method of accounting which he originates, by requesting permission of the Commissioner to change, and also cases where taxpayer shifts from one method of accounting to another without the Commissioner's permission. A change in the taxpayer's method 1962 U.S. Tax Ct. LEXIS 135">161 of accounting required by a revenue agent upon examination of the taxpayer's return would not, however, be considered as initiated by the taxpayer. [H. Rept. No. 775, 85th Cong., 1st Sess., pp. 19, 20 (1957), 1958-3 C.B. 829, 830.]The Senate Finance Committee report adds the following:Testimony before your committee has suggested that the primary concern with the proposed revision of section 481 has been with its application to those cases where taxpayers have already changed their method of accounting in some year from 1954 up to 1958. In some cases taxpayers have made these changes without obtaining the consent of the Treasury Department. Moreover, they have made these changes on the assumption that no adjustment need be made to the extent it is attributable to periods prior to 1954. * * [S. Rept. No. 1983, 85th Cong., 2d Sess., pp. 48, 49 (1958), 1958-3 C.B. 969, 970.]The foregoing examples of "initiate" do not offer a precise answer to whether a taxpayer, without direction from a revenue agent and absent a determination by respondent, "initiates" a change of method for purposes of section 481 when he changes his method1962 U.S. Tax Ct. LEXIS 135">162 of computing taxable income in compliance with the requirement of section 446(a). Nor do the provisions of section 1.481-1(c)(5), Income Tax Regs., which are as follows, provide an answer:A change in the method of accounting initiated by the taxpayer includes not only a change which he originates by securing the consent of the Commissioner, but also a change from one method of accounting to another made without the advance approval of the Commissioner. A change in the taxpayer's method of accounting required as a result of an examination of the taxpayer's income tax return will not be considered as initiated by the taxpayer. On the other hand, a taxpayer who, on his own initiative, changes his method of accounting in order to conform to the requirements of any Federal income tax regulation or ruling shall not, merely because of such fact, be considered to have made an involuntary change.It will be noted that the examples given in the foregoing regulations are taken from the committee reports except that the Treasury Department has also provided that a change on the taxpayer's own initiative to conform to an income tax regulation or ruling shall not, absent other factors, be considered1962 U.S. Tax Ct. LEXIS 135">163 an "involuntary change." The regulations 38 T.C. 263">274 equate a change "initiated" by the taxpayer as one which is "voluntary" on his part. See also sec. 1.481-1(c)(2), Income Tax Regs. On the other hand, the committee reports use the word "initiate" as being synonymous with "originate."We assume that the word "initiated" was deliberately chosen by Congress and that we must give it its commonly accepted meaning in the light of the context in which it is used. "Initiate" is defined in Webster's New International Dictionary (2d ed. 1950): "To introduce by a first act; to make a beginning with; to originate; begin." In the light of the reason for the amendment as stated in the committee reports quoted above and the language used in those reports, we think Congress was more concerned with who was the movant in making the change rather than why the change was made. To interpret the provision in the manner requested by petitioners would give an advantage to the taxpayer who had deliberately kept his books or reported income on the wrong method and then chose the year 1954 to correct his error to conform to the law. We find nothing to support or justify such an interpretation.Petitioners1962 U.S. Tax Ct. LEXIS 135">164 rely on Lindner v. United States, F. Supp. (D. Utah 1961), for the proposition that Fred did not "initiate" the change here involved. In that case, the taxpayers, as partners, maintained their books and filed their returns on the cash method until they were advised by a revenue agent in the course of an audit of their books that they were required to change to the accrual method. They changed both the method of keeping the partnership books and their method of reporting as a direct result of the examining officer's statements. Had it not been for the agent's direction to change accounting methods, the taxpayers would not have made the change. Under such circumstances, the District Court held that adjustments attributable to pre-1954 tax years were not authorized by section 481, as amended, because the taxpayers had not "initiated" the change in accounting for purposes of section 481(a)(2), as amended. The court recited the committee reports to which we have referred, in which "initiate" was treated as "originate," and found that Congress intended the term "initiate" to have ordinary meaning in the context of section 481.Lindner v. United States, supra, 1962 U.S. Tax Ct. LEXIS 135">165 in contrast to petitioners' argument, would seem to support our conclusion that Fred "initiated" the change in controversy because he originated it. Fred took the first step to set the change in motion; without direction from an agent of respondent, he commenced the change. We hold that on the facts of this case, Fred "initiated" the change in method of computing taxable income, within the meaning of section 481(a)(2), as amended, and that the necessary adjustments with respect to pre-1954 years may be made.38 T.C. 263">275 This conclusion brings us to petitioners' next argument. As they express the argument on brief, their contention is:If this Court determines that taxpayer is subject to tax under section 481 of the Code as amended by Section 29 of the [Technical Amendments] Act of 1958, then the transitional adjustment is limited to the net total of those items of income which had not been taxed prior to January 1, 1954.From 1937 through 1940, and from 1943 through 1949, 12 Fred filed returns reporting income on a cash basis except that he used inventories. For the taxable year 1949, he reported an opening inventory of $ 30,673.03 and a closing inventory, which served to reduce1962 U.S. Tax Ct. LEXIS 135">166 costs of goods sold as a deduction from sales, in the amount of $ 34,017.51. This closing inventory for 1949 should properly have served as the opening inventory for 1950, but Fred, who did not use inventories in computing taxable income for the taxable years 1950, 1951, 1952, or 1953, did not so treat it on his 1950 return. As a consequence, contend petitioners, Fred's closing inventory for 1949 was improperly excluded from his return for 1950 and thus Fred failed to receive a tax benefit from it, or as they express it, the item did not escape taxation.Further, it appears that Fred's return for the taxable year 1947 was the subject of an examination by an agent of respondent. The examining officer determined that Fred reported for 1947 on a cash basis, except that he used inventories, and that Fred included in both opening and closing inventories for 1947, goods which had not been 1962 U.S. Tax Ct. LEXIS 135">167 paid for. 13 The agent compared accounts payable pertaining to merchandise at the beginning of the year with such accounts payable at the end of the year and found the difference to be $ 3,132.03. He added this decrease in such accounts payable to taxable income for 1947. 14 The net effect was to decrease reported opening inventory by a greater amount than closing inventory had been decreased and thereby to reduce costs of goods sold as reported. Fred paid the deficiency which resulted from this and from other adjustments.1962 U.S. Tax Ct. LEXIS 135">168 By reason of these facts, petitioners argue that the transitional adjustment authorized by section 481, as computed by respondent in 38 T.C. 263">276 the net total amount of $ 177,683.27, should be reduced by the amount of $ 34,017.51, representing the closing inventory for 1949 that was not utilized as an opening adjustment for 1950 and by the amount of $ 3,132.03, representing the adjustment to income made by the examining officer for 1947. They say that to the extent of $ 37,149.54, the total of the two foregoing adjustments, inventory at December 31, 1953, has not escaped taxation. As we understand petitioners' contention, they are attempting, by computation of a transitional adjustment under section 481, to recoup tax paid by reason of erroneous -- or at least inconsistent -- treatment of inventory in prior years.Were we concerned with the basis of inventory in the hands of a predecessor taxpayer, there may be merit to petitioners' contention. See Ezo Products Co., 37 T.C. 385">37 T.C. 385 (1961), on appeal (C.A. 3, Mar. 5, 1962), and cases cited therein. But we are dealing with the adjustments authorized by a Code provision with respect to a year of change1962 U.S. Tax Ct. LEXIS 135">169 of accounting method. There are to be taken into account only those adjustments "which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted." Section 481 does not provide a means by which errors of past years may be corrected; it applies only to those adjustments made necessary by the taxpayer's change in method. Since Fred's change was in the taxable year 1954, those adjustments are with respect to inventory, accounts receivable, and accounts payable at December 31, 1953, and we find no authority in section 481 to relate Fred's closing inventory for 1953 to his closing inventory for 1949 or 1947.Petitioners' argument, if sustained, would logically require an examination of every taxable year that Fred has been in business, since it appears that the sale of merchandise has always been an income-producing factor. Section 481 would have to be interpreted as permitting the correction of errors long since ordinarily barred by the statute of limitations. We do not believe that section 481 sanctions such corrections, even if they could be accurately determined.Furthermore, petitioners have not proved that the entire1962 U.S. Tax Ct. LEXIS 135">170 cost of Fred's inventory in the amount of $ 93,935.59, as shown on his books at December 31, 1953, was not deducted in 1953 or prior years in accordance with Fred's cash method of reporting. Presumably the cost of the inventory was so deducted, and petitioners do not contend that it was not. If such is the case, respondent's proposed adjustment with respect to 1954 opening inventory is necessary to prevent the duplication of a deduction, without regard to what the erroneous treatment of inventory may have been in 1947 or 1949.We conclude that respondent's proposed net adjustment to income in Fred's year of change is correct, and that the additional income resulting from the net adjustment is to be spread over a 10-year 38 T.C. 263">277 period, with one-tenth of the amount of $ 177,683.27 being taken into account in each of the years 1954 through 1958. This brings us to petitioners' final contention, raised by amendment to the petition.Petitioners argue that the assessment of a deficiency for the taxable year 1954 is barred by the statute of limitations. Petitioners filed their 1954 return on April 14, 1955. Respondent's determination of a deficiency herein was made on February 24, 1962 U.S. Tax Ct. LEXIS 135">171 1960, and absent the execution of agreements extending the statute of limitations, petitioners' argument would have merit, since respondent relies only on such agreements to extend the statutory period for determination of a deficiency for 1954. Both agreements, the first executed in December 1957 and the second in December 1958, provided "That the amount of any income * * * taxes due under any return (or returns) made by or on behalf of [petitioners] for the taxable year ended December 31, 1954, under existing acts, or under prior revenue acts, may be assessed at any time on or before June 30, 1959" (extended to June 30, 1960, under the second agreement). (Emphasis supplied.)The Technical Amendments Act of 1958, which first authorized pre-1954 adjustments, was enacted September 2, 1958. Petitioners maintain generally that the first agreement, executed in 1957, does not permit an assessment based upon legislation enacted subsequent to the execution of the agreement; and that the proposed assessment is not timely under the second agreement because "when the second waiver was executed on December 9, 1958, no rights or liabilities then existed under the Act of 1958 which could1962 U.S. Tax Ct. LEXIS 135">172 be the subject of an extension."Petitioners rely upon the case of Toxaway Mills v. United States, 61 Ct. Cl. 363">61 Ct. Cl. 363 (1925), and upon language from Chadbourne & Moore, Inc., 16 B.T.A. 1054">16 B.T.A. 1054 (1929), to sustain their position. We do not think either of these cases requires the conclusion urged by petitioners.In 61 Ct. Cl. 363">Toxaway Mills v. United States, supra, the Court of Claims actually held that the taxpayer could not recover from the Government additional taxes alleged to have been assessed and collected after the statute of limitations had run because taxpayer had failed to prove an overpayment of tax. While the validity of a waiver executed prior to enactment of a statute authorizing waivers was discussed by the court in its opinion, we cannot find that it reached any conclusion with respect thereto. Furthermore, in this case, apparently unlike the situation in Toxaway Mills, there was no change in the statutory provisions regarding consents.In 16 B.T.A. 1054">Chadbourne & Moore, Inc., supra, the taxpayer executed waivers for the taxable years 1919 and 1920 prior to the1962 U.S. Tax Ct. LEXIS 135">173 enactment of the Revenue Act of 1926 which extended the time for assessment of tax due for 1919 and 1920 under existing or prior revenue Acts to December 38 T.C. 263">278 31, 1926. The Commissioner determined deficiencies for 1919 and 1920 after the effective date of the Revenue Act of 1926 but computed on the basis of an agent's report made before the effective date of that Act. Taxpayer argued that it had not consented to an extension except under existing law and that the Revenue Act of 1926 "changed the provisions under which petitioner's liability might be calculated, changed the method by which it might be assessed and collected, and changed the procedure, jurisdiction and organization of the Board of Tax Appeals and of the Courts." The Board found that the assessment was made under the Revenue Act of 1921 and that the waivers were valid and respondent's determination timely. In the course of its opinion it was stated:The waivers filed by the petitioner grant to the Commissioner no rights of assessment and collection beyond those contained in the Revenue Act of 1924, and prior acts, or in waivers already on file in the Bureau, and they expired by express limitation on December 1962 U.S. Tax Ct. LEXIS 135">174 31, 1926. If, therefore, the Commissioner had determined the asserted deficiency and proposed to assess the tax under the provisions of the Revenue Act of 1926, we might be constrained to hold that the waivers here in question were not effective to convey such authority. * * * [16 B.T.A. 1057">16 B.T.A. 1057.]While the foregoing language, upon which petitioners strongly rely, appears to have been dictum in that case, the case is also distinguishable on its facts. There the only waiver extant was one executed prior to enactment of the Revenue Act of 1926 and permitted assessment of the tax under the law existing when the waiver was executed. Here the second waiver was executed while the period of limitation was still open under the first waiver and after enactment of the Technical Amendments Act of 1958. The language of the second waiver would clearly permit assessment under the 1958 Act and the parties are presumed to know what they were doing when this waiver was executed.The consents executed by the parties herein have statutory sanction and recognition by section 6501(c)(4)15 which provides that the taxpayer and the Secretary of the Treasury or his delegate may1962 U.S. Tax Ct. LEXIS 135">175 consent in writing to extend the statutory period for assessment and that such "period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon." The statute refers only to time, and leaves the parties free to decide for themselves the terms on which an extension will be granted. The time within which an assessment could be made or another extension granted was still open when the second waiver was 38 T.C. 263">279 executed, and the statutory notice of deficiency was mailed to petitioners prior to the expiration of the period fixed in the second waiver. Petitioners do not claim that a mistake was made or that they did not understand the purport of the second waiver. We perceive no reason why the terms of the second agreement should be limited by the terms of the first agreement. Compare H. R. Cullen, 41 B.T.A. 1054">41 B.T.A. 1054 (1940), reversed on another issue 118 F.2d 651 (C.A. 5, 1941).1962 U.S. Tax Ct. LEXIS 135">176 We hold respondent's determination with respect to the year 1954 to be timely.Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended by the Technical Amendments Act of 1958, unless otherwise indicated.↩2. The issues involved concern a business conducted by Fred P. Pursell. Our references herein to Fred will include both petitioners where applicable.↩1. Retained copy unavailable.↩3. SEC. 481. ADJUSTMENTS REQUIRED BY CHANGES IN METHOD OF ACCOUNTING.(a) General Rule. -- In computing the taxpayer's taxable income for any taxable year (referred to in this section as the "year of the change") -- (1) if such computation is under a method of accounting different from the method under which the taxpayer's taxable income for the preceding taxable year was computed, then(2) there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted, except there shall not be taken into account any adjustment in respect of any taxable year to which this section does not apply unless the adjustment is attributable to a change in the method of accounting initiated by the taxpayer↩. [Emphasis supplied.]4. Although this proceeding is directly concerned only with the years 1954-1958, presumably respondent's determination would also require the inclusion in taxable income of the amount of $ 17,768.33 in each of the taxable years 1959-1963.↩5. SEC. 481(b) Limitation on Tax Where Adjustments are Substantial. -- * * *(4) Special rule for pre-1954 adjustments generally. -- Except as provided in paragraphs (5) and (6) -- (A) Amount of adjustments to which paragraph applies. -- The net amount of the adjustments required by subsection (a), to the extent that such amount does not exceed the net amount of adjustments which would have been required if the change in method of accounting had been made in the first taxable year beginning after December 31, 1953, and ending after August 16, 1954, shall be taken into account by the taxpayer in computing taxable income in the manner provided in subparagraph (B), but only if such net amount of such adjustment would increase the taxable income of such taxpayer by more than $ 3,000.(B) Years in which amounts are to be taken into account. -- One-tenth of the net amount of the adjustments described in subparagraph (A) shall (except as provided in subparagraph (C)) be taken into account in each of the 10 taxable years beginning with the year of the change. The amount to be taken into account for each taxable year in the 10-year period shall be taken into account whether or not for such year the assessment of tax is prevented by operation of any law or rule of law. If the year of the change was a taxable year ending before January 1, 1958, and if the taxpayer so elects (at such time and in such manner as the Secretary or his delegate shall by regulations prescribe), the 10-year period shall begin with the first taxable year which begins after December 31, 1957. If the taxpayer elects under the preceding sentence to begin the 10-year period with the first taxable year which begins after December 31, 1957, the 10-year period shall be reduced by the number of years, beginning with the year of the change, in respect of which assessment of tax is prevented by operation of any law or rule of law on the date of the enactment of the Technical Amendments Act of 1958.↩6. The litigation under the 1939 Code is of interest because it provided the climate in which Congress enacted the new provision in section 481 of the 1954 Code. However, we think it would unjustifiably prolong this opinion to attempt a discussion of that litigation here. For a review of the litigation see the opinion in Welp v. United States, 103 F. Supp. 551">103 F. Supp. 551 (N.D. Iowa 1952). While this decision was reversed by the Court of Appeals, 201 F.2d 128 (C.A. 8, 1953), the reviewing court complimented the "comprehensive review of authorities so well done in the trial court's opinion." See also David W. Hughes, 22 T.C. 1">22 T.C. 1 (1954); Clement A. Bauman, 22 T.C. 7">22 T.C. 7 (1954); Advance Truck Co., 29 T.C. 666">29 T.C. 666 (1958), affd. 262 F.2d 388 (C.A. 9, 1958); Stanford R. Brookshire, 31 T.C. 1157">31 T.C. 1157 (1959), affd. 273 F.2d 638 (C.A. 4, 1960); Commissioner v. Frame, 195 F.2d 166 (C.A. 3, 1952), affirming 16 T.C. 600">16 T.C. 600 (1951); Commissioner v. Schuyler, 196 F.2d 85 (C.A. 2, 1952); Commissioner v. Cohn, 196 F.2d 1019 (C.A. 2, 1952); and Commissioner v. Dwyer, 203 F.2d 522 (C.A. 2, 1953), the latter three cases affirming Memorandum Opinions of this Court, for cases decided since the District Court opinion in 103 F. Supp. 551">Welp v. United States, supra. See also Dixon, "Pyramiding Income In Changing From A Cash To An Accrual Method of Accounting," 8 Tax L. Rev. 355↩ (1953). Suffice it to say that a study of that litigation makes it clear that the climate was at best cloudy.7. Nevertheless, we limit our decision to the facts here involved where taxpayer had kept his books on the accrual basis which admittedly properly reflected his income in prior years as well as the year of change. Of course in section 29 of the Technical Amendments Act of 1958, amending section 481(a)↩, Congress did insert one proviso which may or may not have been developed in the litigation under the 1939 Code. We discuss that proviso in dealing with another point of petitioners' argument.8. H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., pp. 115, 116 (1954).↩9. H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 202 (1954).↩10. SEC. 446. GENERAL RULE FOR METHODS OF ACCOUNTING.(a) General Rule. -- Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.↩11. To the same effect, see S. Rept. No. 1983, 85th Cong., 2d Sess., pp. 44, 45 (1958), 1958-3 C.B. 965↩, 966.12. Retained copies of Fred's returns for 1941 and 1942 are unavailable, and the filed originals have been destroyed by respondent.↩13. Testimony of the agent indicates that he considered Fred to have reported income for 1947 on "sort of a hybrid basis," by which he meant that Fred used inventories but otherwise reported income and deductions (including sales and purchases) on a cash basis.↩14. Workpapers attached to the examining officer's report for 1947 show the decrease in such accounts payable to have been $ 3,132.63, but the adjustment was in the amount of $ 3,132.03. The examining officer made no adjustment with respect to accounts receivable and did not otherwise force Fred to the accrual method of reporting. The workpapers also show that accounts payable pertaining to merchandise increased from $ 4,596.16 at the beginning of 1946 to $ 14,961.63 at the end of 1946, and if an adjustment had been similarly made for 1946, the result would have been a decrease in income for that year and probably the determination of an overassessment. We are not advised whether such an adjustment was made for 1946.↩15. SEC. 6501(c)(4)↩ Extension by agreement. -- Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed by this title, except the estate tax provided in chapter 11, both the Secretary or his delegate and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620815/	Langley Park Apartments, Sec. C, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentLangley Park Apartments, Sec. C, Inc. v. CommissionerDocket No. 5410-63United States Tax Court44 T.C. 474; 1965 U.S. Tax Ct. LEXIS 67; June 25, 1965, Filed 1965 U.S. Tax Ct. LEXIS 67">67 Decision will be entered for the respondent. Petitioner, which owned an apartment building, employed a real estate brokerage and management firm to lease its apartments, collect rents, and, in general, to manage its apartment building. The management firm, among its other duties, hired janitorial service, provided a resident manager and assistant manager, and prepared monthly operational statements as well as various necessary FHA reports. Petitioner's stock was owned by Jamshed Vesugar (president) and his wife (vice president and treasurer). Held, petitioner has not shown that it was entitled to deduct as reasonable compensation for its two corporate officers in the fiscal years 1957, 1960, 1961, and 1962 any amounts in excess of the amounts allowed by respondent. Werner Strupp, for the petitioner.Herbert A. Seidman, for the respondent. Mulroney, Judge. MULRONEY 44 T.C. 474">475 Respondent determined deficiencies in petitioner's corporate income tax for the fiscal years ended April 30, 1960, 1961, and 1962, in the respective amounts of $ 2,158.57, $ 4,043.97, and $ 4,560.11.The sole issue is the reasonableness of salaries paid to officers and claimed as deductions for the above years and for the year ended April 30, 1957, which latter year is involved because of a net operating loss carry-forward affecting the years in issue.FINDINGS OF FACTSome of the facts have been stipulated and they are found accordingly.Petitioner, Langley Park Apartments, Sec. C, Inc., is a Maryland corporation that owns an apartment building located at Merrimac Drive and New Hampshire Avenue, in Prince Georges County, Md. Petitioner's apartment building contains 68 one-bedroom apartments and 66 two-bedroom apartments. It is actually 1 section of a 10-section apartment complex which contains in all 1,520 apartments. All of the sections were built at the same time and they are identical in construction and rent1965 U.S. Tax Ct. LEXIS 67">69 for the same rent but the sections are owned by various persons.Petitioner filed its income tax returns for the fiscal years herein involved with the district director of internal revenue, in Baltimore, Md. Jamshed Vesugar and his wife Estelle Reid Vesugar acquired all of petitioner's common stock (400 shares) as of August 1951 at a cost of $ 107,200. Thereafter until August 17, 1959, Jamshed Vesugar owned 300 shares and Estelle 100 shares of said stock. After August 17, 1959, they each owned 200 shares of said common stock.During the fiscal years ended April 30, 1952, to April 30, 1962, inclusive, Jamshed Vesugar was a member of the petitioner's board of directors and also its president. During the fiscal years ended April 30, 1952, to April 30, 1962, inclusive, Estelle Reid Vesugar was a member of the petitioner's board of directors and held the office of vice president and treasurer. On April 20, 1960, Estelle Reid Vesugar 44 T.C. 474">476 was elected as assistant secretary of the petitioner and held that office for the remainder of the taxable periods involved.Petitioner's apartment property has at all times been subject to a Federal Housing Administration insured mortgage. When1965 U.S. Tax Ct. LEXIS 67">70 the Federal Housing Administration, hereinafter referred to as FHA, participates in the financing of an apartment project such as petitioner's, it establishes the maximum rentals per apartment which the mortgagor-owners may charge. The mortgagor-owner is prohibited by the FHA from charging apartment rents in excess of the established apartment rent. If a mortgagor-owner desires to increase the apartment rentals authorized by the FHA, he must first apply for and then obtain from the FHA a rent increase authorization. Any applications for rent increase had to be filed in conjunction with the applications of the other section owners. Three of petitioner's applications for rent increase for its apartments were granted by FHA between 1956 and 1961.During the fiscal years ended April 30, 1951, to April 30, 1962, inclusive, petitioner employed a Washington, D.C., real estate brokerage and management firm to lease its apartments, collect rents, and, in general, to manage its apartment building. An officer of this firm executes all the leases in connection with petitioner's apartments, and all the executed leases are kept at the firm's office in Washington. This management firm hired1965 U.S. Tax Ct. LEXIS 67">71 two janitors for petitioner's property. One janitor occupied an apartment on the premises rent free and the other lived elsewhere and worked there each day. The management firm paid the janitors' salaries. There is also a management office maintained on the premises for petitioner's section and the three other sections controlled by the same management firm. This office is staffed by a resident manager and an assistant manager hired by the management firm. The resident manager and assistant manager largely supervised the janitors and repair work and aided in showing and renting apartments. An employee of the management firm visits the apartment building each day and checks with the resident manager and sees to needed maintenance and orders needed supplies which are all paid for by the management firm. Any repairs of $ 50 or less would be handled without consulting the owners. Each month the management firm would send the owners a statement showing the rents collected, the various expenditures for supplies, and operation, including the salaries of the janitors and the pro rata share (with the other three sections) of the salaries of the resident manager and assistant manager1965 U.S. Tax Ct. LEXIS 67">72 and the pro rata share of the resident manager's office. The firm would deduct from the rents collected all of the operating expenses and its fee of 3 percent of the gross rents and its check for the difference would accompany the monthly statement. The management firm also 44 T.C. 474">477 prepared some of the reports required by the FHA from the petitioner, prepared and filed petitioner's applications for rent increases with the FHA, prepared petitioner's Federal payroll tax returns, and prepared petitioner's State workmen's compensation reports. For its services during the fiscal years ended April 30, 1957, to April 30, 1962, inclusive, the firm was paid the said 3 percent of gross rentals which, during the years in question, were paid amounts ranging from $ 3,676.54 in 1957 up to $ 4,079.80 in 1962.During the fiscal years ended April 30, 1951, to April 30, 1962, inclusive, petitioner employed an independent accounting firm to prepare all of its financial statements, tax returns, and to maintain its financial records and books of account. In addition, the accounting firm prepared annual financial reports which were filed with the FHA. For its services during the fiscal years ended1965 U.S. Tax Ct. LEXIS 67">73 April 30, 1957, to April 30, 1962, inclusive, the independent accounting firm was paid $ 600 for the year 1958 and $ 400 for the years 1957, 1959, and 1960, and $ 500 for the years 1961 and 1962.During the fiscal years ended April 30, 1951, to April 30, 1962, inclusive, the petitioner maintained only a single checking account in the Munsey Trust Co. The only checks drawn by petitioner on this account were for the payment of officers' salaries and withdrawals, accounting fees, legal fees, State and Federal taxes and fees, and corporate distributions to shareholders.Shortly after the Vesugars acquired petitioner's stock in 1951, a special meeting of the corporation directors was held at which the salary of its president Jamshed Vesugar, was fixed at the rate of $ 12,000 annually and that of the vice president and treasurer (Estelle Vesugar) at $ 4,800. Actually, during the fiscal years ending April 30, 1952, through April 30, 1962, the petitioner did not determine the actual compensation payable to its officers for the fiscal year until the end of each fiscal year.Beginning with the year ended April 30, 1955, petitioner's officers began making withdrawals from petitioner, which1965 U.S. Tax Ct. LEXIS 67">74 withdrawals were generally charged to a loan account. At the end of the fiscal year, when petitioner's income was known, the loan account would usually be closed out and balancing charges would be made to the officers' salary account and to the surplus account. The amount closed to the surplus account would then usually be declared as a dividend even though in all but 2 years (1958 and 1960) the dividends were not paid out of current or accumulated earnings and profits.The following is a portion of the stipulation of facts which begins with paragraph numbered 14 and ends with paragraph numbered 21, which illustrates the method by which the officers' salaries were fixed 44 T.C. 474">478 and handled for the years 1955 through 1962 as disclosed by petitioner's books and records:14. During the fiscal year ended April 30, 1955 Jamshed Vesugar withdrew cash totaling $ 4300 from the petitioner, which withdrawals were designated as "loans" on the petitioner's books of account. The withdrawals by Jamshed Vesugar were noninterest bearing, unsecured and not evidenced by notes or other instruments of indebtedness. At the close of the fiscal year ended April 30, 1955 the "loan account" balance 1965 U.S. Tax Ct. LEXIS 67">75 of $ 4300 was reduced to zero by charging $ 3700 to the surplus account and $ 600 to the officers' salary account.The petitioner's board of directors at a special meeting on October 8, 1954 declared a dividend on common stock in the amount of $ 2400. The petitioner's board of directors at its annual meeting on April 20, 1955 declared a dividend on common stock in the amount of $ 3700. The $ 3700 transfer from the "loan account" to the "surplus account" was the basis for the $ 3700 dividend. Thus, it was not necessary to transfer any cash to Jamshed and Estelle Vesugar at the time of the dividend declaration of $ 3700.The total dividends of $ 6100 for the fiscal year ended April 30, 1955 were not, according to petitioner's books of account, paid out of current earnings and profits or out of accumulated earnings and profits of the petitioner.15. During the fiscal year ended April 30, 1956 Jamshed Vesugar withdrew cash totaling $ 4000 from the petitioner, which withdrawals were designated as "loans" on petitioner's books of account. The withdrawals by Jamshed Vesugar were noninterest bearing, unsecured and not evidenced by notes or other instruments of indebtedness. At the close1965 U.S. Tax Ct. LEXIS 67">76 of the fiscal year ended April 30, 1956 the "loan account" balance of $ 4000 was reduced to zero by charging $ 2300 to the surplus account and $ 1700 to the officers' salary account.The petitioner's board of directors at its annual meeting on April 18, 1956 declared a dividend on common stock in the amount of $ 2300. The transfer from the loan account was the basis for the $ 2300 dividend. Thus, it was not necessary to transfer any cash to Jamshed and Estelle Vesugar at the time of the dividend declaration.The dividend of $ 2300 for the fiscal year ended April 30, 1956 was not according to petitioner's books of account, paid out of current earnings and profits or out of accumulated earnings and profits of the petitioner.16. During the fiscal year ended April 30, 1957 Jamshed Vesugar withdrew cash totaling $ 400 from the petitioner, which withdrawals were designated as "loans" on petitioner's books of account. The withdrawals by Jamshed Vesugar were noninterest bearing, unsecured and not evidenced by notes or other instruments of indebtedness. Near the close of the fiscal year ended April 30, 1957 the "loan account" balance of $ 400 was reduced to zero by charging $ 400 to the1965 U.S. Tax Ct. LEXIS 67">77 surplus account.The petitioner's stockholders at their annual meeting on April 17, 1957 declared a dividend on common stock in the amount of $ 400. The $ 400 transfer from the loan account was the basis for the $ 400 dividend. Thus, it was not necessary to transfer any cash to Jamshed and Estelle Vesugar at the time of the dividend declaration.The dividend of $ 400 for the fiscal year ended April 30, 1957 was not according to petitioner's books of account paid out of current earnings and profits or out of accumulated earnings and profits of the petitioner.17. During the fiscal year ended April 30, 1958 Jamshed Vesugar withdrew cash totaling $ 4000 from petitioner which withdrawals were designated as "loans" on petitioner's books of account. The withdrawals by Jamshed Vesugar 44 T.C. 474">479 were noninterest bearing, unsecured and not evidenced by notes or other instruments of indebtedness. At the close of the fiscal year ended April 30, 1958 the "loan account" balance of $ 4000 was reduced to zero by charging $ 4000 to the surplus account.The petitioner's board of directors at their annual meeting on April 16, 1958 declared a dividend on common stock in the amount of $ 4000. The1965 U.S. Tax Ct. LEXIS 67">78 $ 4000 transfer from the loan account was the basis for the $ 4000 dividend. Thus, it was not necessary to transfer any cash to Jamshed and Estelle Vesugar at the time of the dividend declaration.As of the close of the fiscal year ended April 30, 1958 the petitioner's books of account disclosed that petitioner had no accumulated earnings and profits. The petitioner's income tax return for the fiscal year ended April 30, 1958 reported current earnings of $ 873.07.18. During the fiscal year ended April 30, 1959 Jamshed Vesugar withdrew cash totaling $ 9190 and Estelle Vesugar withdrew cash totaling $ 2500 from petitioner. These withdrawals were designated as "loans" on petitioner's books of account. The withdrawals by Jamshed and Estelle Vesugar were noninterest bearing, unsecured and not evidenced by notes or other instruments of indebtedness. The withdrawals remained on the corporate books of account as loans at the close of the fiscal year ended April 30, 1959.The board of directors of petitioner declared no dividend on common stock for the fiscal year ended April 30, 1959.19. During the fiscal year ended April 30, 1960 Jamshed Vesugar withdrew cash totaling $ 8310 and Estelle1965 U.S. Tax Ct. LEXIS 67">79 Vesugar withdrew cash totaling $ 300 from the petitioner. These withdrawals by Jamshed and Estelle Vesugar were designated as "loans" on petitioner's books of account. The withdrawals were noninterest bearing, unsecured and not evidenced by notes or other instruments of indebtedness. At the close of the fiscal year ended April 30, 1960 the loan account balance of $ 20,300 ($ 11,690 balance from fiscal year 1959 plus $ 8610 balance from current year) was reduced to zero by charging $ 20,300 to the surplus account.The petitioner's board of directors at their annual meeting on April 20, 1960 declared a dividend on common stock in the amount of $ 20,300. The $ 20,300 transfer from the loan account was the basis for the $ 20,300 dividend. Thus, it was not necessary to transfer any cash to Jamshed and Estelle Vesugar at the time of the dividend declaration. The petitioner's income tax return for the fiscal year ended April 30, 1960 reported earnings for the year of $ 895.23.20. During the fiscal year ended April 30, 1961 Jamshed Vesugar withdrew cash totaling $ 15,200. Of the amounts withdrawn, $ 11,000 was charged to the loan account of Jamshed Vesugar and $ 4200 was charged to1965 U.S. Tax Ct. LEXIS 67">80 the Jamshed Vesugar salary account. The amounts withdrawn and charged to the loan account were not evidenced by notes or other instruments of indebtedness, were unsecured and noninterest bearing.On April 30, 1961 entries were made on petitioner's books of account which reduced Jamshed Vesugar's loan account balance by $ 9920. Correspondingly, the officers' salary account of Jamshed Vesugar was increased by $ 3600 and the officers' salary account of Estelle Vesugar was increased by $ 6320. The entries were made pursuant to instructions of petitioner's board of directors.Since the reduction in Jamshed and Estelle Vesugar's loan account was the basis for the salary account entries, no cash was received from petitioner by Jamshed and Estelle Vesugar at the time of these entries. The $ 15,200 withdrawn during the fiscal year ended April 30, 1961 was obtained by checks drawn on petitioner's checking account and made payable to Jamshed Vesugar.44 T.C. 474">480 21. During the fiscal year ended April 30, 1962 Jamshed Vesugar withdrew cash totaling $ 15,000 from petitioner, all of which was charged to the officers' salary account. The amounts withdrawn were obtained by checks drawn on petitioner's1965 U.S. Tax Ct. LEXIS 67">81 checking account and made payable to Jamshed Vesugar.The minutes of the annual meeting of the stockholders held on April 17, 1957, contain the following paragraph:After considerable discussion, it was duly moved, seconded and approved that the salary for Estelle Reid Vesugar as Vice-President and Treasurer of this Corporation be discontinued beginning January 1, 1957 until further notice. Such unpaid salary to be ultimately paid when the financial condition of the Corporation justifies such disbursement.The minutes of the annual meeting of the stockholders held on April 20, 1960, contain the following paragraph:Discussion was had concerning the salary of Estelle Reid Vesugar, which had been discontinued by action of the Board in 1957. Upon motion being duly made, seconded and passed the Board re-established this salary for the coming fiscal year of the corporation at the rate of $ 4,800.00 per annum, subject to the ability of the corporation to meet this committment [sic].The minutes of the annual meeting of the stockholders held on April 19, 1961, show that a possible distribution to the shareholders was discussed and tabled and the minutes contain the following paragraph: 1965 U.S. Tax Ct. LEXIS 67">82 Discussion was had concerning the advances that had been made to the principal corporate officers during the fiscal year and it was the consensus of the Board that the corporation's accountants be instructed to convert the following amounts from the advance account to the Officers' Salary account:$ 9,920.00, applied as follows: to Estelle Reid Vesugar $ 4,800.00 for the current fiscal year, plus $ 1,520.00 unpaid balance due her on her salary for the fiscal year ended April 30, 1953; and to Jamshed Vesugar $ 3,600.00 for the current year, which would then bring his total salary for this fiscal year to $ 7,800.00.The minutes of the stockholders' meeting of April 18, 1962, again show a possible distribution to the shareholders was discussed and tabled. On the back of these minutes there appears the following:Paragraph omitted in error.The President's salary was continued at the authorized amount of $ 12,000.00 per annum, and by motion being duly made, seconded and approved, it was; resolved that $ 3,000.00 of unpaid salary, due the President, from previous fiscal years (during which the salary had not been paid in full) be paid.(Signed) E. R. V.On its returns for the fiscal1965 U.S. Tax Ct. LEXIS 67">83 years ended April 30, 1957, April 30, 1960, April 30, 1961, and April 30, 1962, the petitioner claimed deductions for officers' salaries as follows:FYE Apr. 30 --JamshedEstelleVesugarVesugar1957$ 8,200019607,800019617,800$ 6,32019628,6806,32044 T.C. 474">481 The respondent in his notice of deficiency made the following adjustments with respect to the deductions claimed by petitioner for compensation paid to its officers:DeductionsFYE Apr. 30 --Jamshed VesugarEstelle VesugarAllowedDisallowedAllowedDisallowed1957$ 1,500$ 6,700No deduction claimed19601,5006,300No deduction claimed19611,5006,3000$ 6,32919621,5007,18006,320The petitioner has at no time deducted withholding taxes and except for the years 1952 and 1953 has at no time deducted Federal Insurance Contributions Act taxes from the amounts it paid to its officers and listed on its tax returns as officers' salaries.Beginning in the early part of 1957 and until sometime in 1958 Jamshed Vesugar worked on a full-time basis for the World Bank. Beginning in December of 1958 Jamshed Vesugar was employed as a registered representative1965 U.S. Tax Ct. LEXIS 67">84 for a Washington stock brokerage firm.OPINIONBoth parties agree this case involves the single issue of the reasonableness of the compensation paid to the officers and claimed as deductions under section 162(a)(1), I.R.C. 1954. The cited statute allows deductions for business expenses "including * * * a reasonable allowance for salaries or other compensation for personal services actually rendered." What constitutes reasonable salary or compensation for each corporate officer is a question of fact. Respondent's determination is prima facie correct and petitioner has the burden of proving that it is entitled to a deduction in an amount larger than the amount allowed by respondent. Geiger & Peters, Inc., 27 T.C. 911">27 T.C. 911.We are convinced from a study of the entire record in this case that the compensation paid to each of the officers of petitioner was excessive. This corporation was officer owned and the evidence shows the method employed by petitioner for compensating its officers had no substantial relation to the type and extent of services the officers performed for the corporation. Ordinarily the salaried officer of a corporation draws a fixed amount1965 U.S. Tax Ct. LEXIS 67">85 of pay weekly or monthly which is charged to a compensation account on the books, with a possible end-of-the-year bonus. Here the officers made withdrawals during the year which were charged to what was termed "each officer's loan account," and at the end of the year when petitioner's income was 44 T.C. 474">482 known, each officer's salary for that year would be fixed and all or a part of the loan account would be closed out with a salary charge.This method seems to have been pursued largely upon the advice of the accountant. The testimony of the accountant who said he was a certified public accountant is replete with equivocal statements but he seemed to have been of the opinion that end-of-the-year salary determinations were quite normal and proper for corporations similar to petitioner. He also seemed to be of the opinion that the early fixing of salaries at the special meeting of the stockholders in 1951 ($ 12,000 for the president and $ 4,800 for the vice president) set forth the maximum amounts of the withdrawals that could be charged to salary and any withdrawals in any year that did not exceed these amounts would be justified. He said he was present at most of the yearend meetings1965 U.S. Tax Ct. LEXIS 67">86 of the stockholders of this corporation. He even advised the officers they could in some years draw over what he considered the "maximum" ($ 12,000 and $ 4,800) to make up for the years they had drawn less than the maximum. He said he made pencil memoranda of what occurred at these meetings from which he would have the minutes typed at a later date. Some times he would have the minutes typed 2 or 3 years after the meeting. For instance it was his testimony that he was present at the meeting of April 18, 1962, and made notes but did not type up the minutes from these notes until June of 1963. Between these dates he was visited by an internal revenue agent. He told the agent the minutes of this meeting did not exist but he could not remember whether he had also told him no notes of the meeting existed and then added "I may have told him that." The accountant's testimony is full of conflicting statements. The documents introduced as minutes, especially the minutes for April 19, 1961, and April 18, 1962, bear all of the earmarks of instruments prepared, probably after the salary deductions were being questioned, to bolster a theory that withdrawals might more easily escape the 1965 U.S. Tax Ct. LEXIS 67">87 taint of unreasonable compensation if part was allocated to prior years. The tax return for the period ended April 30, 1962, which is dated July 7, 1962, and which was filed July 10, 1962, bears the accountant's signature as preparer. It states in Schedule E, Compensation of Officers, the amounts of $ 8,680 paid to Jamshed and $ 6,320 paid to Estelle as making up the total $ 15,000 officer compensation.Little is to be gained by a further discussion of the accountant's testimony or such documentary evidence. It is enough to state that the record shows the amounts deducted as salary for officers bore no relation to the measure or value of the officers' services.Respondent's computation of the deficiency allows a deduction for compensation for petitioner's president, Jamshed Vesugar, of $ 1,500 44 T.C. 474">483 a year. He seems to have had the responsibility for overall management in the sense that his was the final decision on all matters of importance. The one big decision that he seems to have made was the policy decision of delegating almost all of the actual management and operation of petitioner's only property and entire business over to a management firm. However, he testified1965 U.S. Tax Ct. LEXIS 67">88 that he kept some personal records of expenditures drawn from the management firm's monthly statements so that he could compare types and items of expenditures with the experience of other property owners. He testified that he visited the property two or three times a month and contacted the management firm by telephone or visits three or four times a week and saw the accountant three or four times a month. He said he laid down guidelines for the management firm to follow such as whether certain apartments should be rented to tenants with one, or more than one, child. He met with other section owners with respect to rent increase applications and he fixed the rents. On one occasion the rents were fixed at less than FHA authorized maximum because similar apartments across the street were renting for less than this authorized maximum. He said he made decisions about painting and repainting halls, passageways, and windows, and the maintenance of the grounds, including hedges and playgrounds. He was consulted by the management firm on all expenditures of over $ 40 or $ 50 and he made rules with respect to decorating apartments when they became vacant. He signed the few corporate1965 U.S. Tax Ct. LEXIS 67">89 checks that were drawn on the company's bank account.All of the president's testimony was general. It does not tell us the services he performed in any certain year except that he did say new refrigerators were purchased for all of the apartments at his direction in 1959. A study of the president's testimony leaves one with the impression that he was having difficulty showing he did much of anything in the line of day-to-day services for petitioner. The rental of an apartment building is a somewhat passive type of business that involves no inventory or capital turnover. It mostly involves rental and management and, when the officers turn over rental and management to a firm engaged in the rental and management business, there is little left for the officers to do. The record here is very unsatisfactory and we might have been aided by testimony of the salaries paid to corporate officers performing similar duties in other similar corporations. Gus Blass Co., 9 T.C. 15">9 T.C. 15. No such testimony was presented by petitioner though the plain indication in this record is that such evidence might well be available. The management firm representative testified1965 U.S. Tax Ct. LEXIS 67">90 his firm performed similar services for other apartment building owners.Petitioner seems to rest his claim to reasonableness of the deductions for officers' salaries upon the relationship of the deductions to the 44 T.C. 474">484 gross income. The record shows petitioner's gross income ranged from about $ 125,000 in 1957 to over $ 136,000 in 1962. 1 The gross income is something to consider but the statute allows the deduction for "reasonable * * compensation for personal services actually rendered." As stated, we do not know what the prevailing compensation paid to like officers in similar corporations is. But we are convinced this record would support no greater deduction than respondent allowed for the services actually performed by its president. It may seem strange to say the president of a corporation, with net assets that are worth more than $ 100,000 and a gross annual income of around $ 136,000, should, as the corporation's only paid officer, only draw $ 1,500 a year as salary. And yet the test supplied by the statute is the reasonableness of the salary deduction with relation to the services performed. The reason why the president's deductible salary is low is because1965 U.S. Tax Ct. LEXIS 67">91 the corporation has hired a business management firm to run its business for it, which left the president with almost no duties to perform for the corporation. When as here the business of the corporation is rental and management, and both rental and management have been almost entirely delegated to a business management and rental firm, it follows that the corporation cannot deduct amounts it paid its officers as salaries, which amounts could only be justified if the officers were doing what the business management firm does.Respondent allowed nothing for the services of Estelle. She seems to have had no regular duties to perform for the corporation and no responsibilities. There is a little evidence that she inspected the building and was sometimes consulted by the management firm about decorating the apartments, about landscaping, and about the playground facilities. 1965 U.S. Tax Ct. LEXIS 67">92 Here again the record is very unsatisfactory. No deduction at all was claimed for compensation for any services rendered by Estelle for the years 1957 and 1960. We are not convinced the self-serving corporate minutes of 1961 and 1962 constitute any justification for the compensation paid to her during those years. Her services were de minimis and could well be explained as voluntarily performed in the interests of her one-half stock investment in the corporation. Any any rate, petitioner did not sustain its burden of showing it was entitled to any deduction for any services performed by Estelle in 1961 and 1962. We hold for respondent on the issue presented.Decision will be entered for the respondent. Footnotes1. Petitioner's income tax returns for the fiscal years 1960, 1961, and 1962 report net incomes of $ 895.23, $ 859.91, and $ 1,700.37, respectively.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620816/	OLINGER MORTUARY ASSOCIATION, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE IMPERIAL INVESTMENT COMPANY, A CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Olinger Mortuary Ass'n v. CommissionerDocket Nos. 29291, 36502.United States Board of Tax Appeals23 B.T.A. 1282; 1931 BTA LEXIS 1738; August 5, 1931, Promulgated 1931 BTA LEXIS 1738">1738 1. Payments made to a dissatisfied minority stockholder to secure his acquiescence in a transaction regarded by the manager of the corporation as necessary for the good of the corporation, are not ordinary and necessary business expenses within the meaning of section 234(a)(1), Revenue Act of 1924. 2. Payment by petitioner of a sum of money to secure the cancellation and abrogation of a contract whereby the holder thereof is to receive 15 per cent of the net profits of another corporation is which petitioner owns all the capital stock, is a capital transaction and does not represent ordinary and necessary business expenses within the meaning of the Revenue Act of 1924. 3. Payment by petitioner of a sum of money in the taxable year to secure the release of certain collateral vitally needed in the conduct of its business and to secure release from payment of $250 per month salary where the party drawing such salary is rendering no services therefor, is an ordinary and necessary business expense and should be allowed as a deduction from gross income in the year when paid. Walter E. Schwed, Esq., and Richard M. Crane, C.P.A., for the petitioners. J. E. McFarland,1931 BTA LEXIS 1738">1739 Esq., for the respondent. BLACK 23 B.T.A. 1282">1282 In these proceedings, which have been consolidated for hearing and decision, the petitioners seek a redetermination of their income-tax liability for the period from May 23, 1924, to December 31, 1924, for which period the respondent has determined a deficiency against the Olinger Mortuary Association in the amount of $4,920.31, and 23 B.T.A. 1282">1283 against the Imperial Investment Company in the same amount, reduced by a tax previously assessed in the amount of $643.53, making a net deficiency as to it in the amount of $4,276.78. At the hearing it was stipulated that there was but one tax liability involved, that the petitioners were affiliated, the Imperial Investment Company being the parent company, and that as to whatever liability is found, the payment by either one of the petitioners will extinguish the primary liability. The sole issue in these proceedings is whether or not the respondent erred in disallowing as expense items certain sums paid in 1924 by the Imperial Investment Company in the amount of $33,047.59, and increasing the net income of each petitioner by the same amount. FINDINGS OF FACT. The Olinger1931 BTA LEXIS 1738">1740 Mortuary Association and the Imperial Investment Company, the petitioners herein, are both corporations organized under the laws of the State of Colorado and have their principal offices in Denver, in that State. The Imperial Investment Company was organized in 1924 and Joseph E. Bona is its president and owns all of its capital stock except three qualifying shares. In October, 1921, Bona was general manager of the Olinger Mortuary Association and had been such for nearly 20 years. On or about October 11, 1921, he entered into a contract in writing with George W. Olinger, Inc., and George W. Olinger, for the purchase of the entire capital stock of the Olinger Mortuary Association. Under that contract the total purchase price to be paid for the stock was $350,000. Of that amount $150,000 was paid in cash. Bona procured $125,000 of said cash payment by borrowing the same from the Collbran-Bostwick Development Company, paying a commission for the procural thereof of $12,500. This particular $12,500 is not in issue in this proceeding. This loan ran for a period of two years. The other $25,000 needed was procured from the American National Bank of Denver. The bank required a1931 BTA LEXIS 1738">1741 comaker of the note and Ben Grimes was procured as the comaker. At the time Bona entered into this agreement with Grimes, they agreed that as payment for Grimes' accommodation in becoming a cosigner and maker of the note, when the indebtedness to the bank was discharged, Grimes was to participate in the net profits of the Olinger Mortuary Association to the extent of 15 per cent, Bona reserving the privilege, however, of repurchasing this participation of Grimes in the profits by paying him $15,000 in cash. The note to the Collbran-Bostwick Development Company was secured by all of the capital stock of the Olinger Mortuary Association. 23 B.T.A. 1282">1284 During the time this loan was in existence a voting trust agreement of date October 11, 1921, between the stockholders of the Olinger Mortuary Association, George W. Olinger and the Collbran-Bostwick Development Company was entered into. When the Collbran-Bostwick loan fell due in October, 1923, the unpaid balance was extended for a period of two years in consideration of an agreement to put Collbran of that company on the pay roll of the Olinger Mortuary Association at $250 a month during the life of the loan, which was done. 1931 BTA LEXIS 1738">1742 The Imperial Investment Company was incorporated in May, 1924, and all rights and liabilities of Joseph E. Bona pertaining to the purchase of the stock of Olinger Mortuary Association were assigned to and assumed by the Imperial Investment Company. On or about January 1, 1922, Bona entered into an agreement in writing to sell three-tenths interest in said stock of Olinger Mortuary Association to Frank W. Farmer. Farmer was to make payment of his stock on the installment plan under terms not material here. In October, 1924, imperial Investment Company negotiated a note issue with the American National Bank of Denver for $180,000. The reasons impelling the securing of this new loan were that it felt it was greatly restricted under the terms of the contract entered into by Bona with George W. Olinger and George W. Olinger, Inc. Under that contract the corporation, Olinger Mortuary Association, had no adequate operating funds or opportunity to accumulate them. The contract provided that when current expenses had been paid, together with the maximum salary that had been provided for Bona, which was $500 per month, and under which he devoted all his time to the business, all funds1931 BTA LEXIS 1738">1743 were to be disbursed to George W. Olinger and the Collbran-Bostwick Development Company. Under the contract Olinger received a salary as president of the company and other withdrawals in the amount of $2,000 per month. He was not required to devote his entire time to the business, but served only in an advisory capacity. Under the aforesaid contract Bona was limited in the choice of personnel. In addition he was under jeopardy by reason of the fact that under the terms of the contract he would default if he should be absent on account of illness for a period of 90 days. The expenditure of all funds received by the corporation, whether it meant additional equipment or adding to the building, or actual expenses that were necessary, was controlled and restricted under the contract. The amount of money which the Imperial Investment Company contracted to borrow from the American National Bank to pay off this burdensome contract with George W. Olinger was to be secured by all of the capital stock of the Olinger Mortuary Association. In connection with this American National Bank loan there was a commission by discount of $8,750 and other expenses of 23 B.T.A. 1282">1285 $997.50 which the1931 BTA LEXIS 1738">1744 Commissioner has allowed in the usual way by prorating over the life of the loan and is not in controversy in this proceeding. The Imperial Investment Company thereupon went to the Collbran-Bostwick Development Company and asked to pay off their loan and secure a release of its stock under the loan agreement with them, but they refused, stating they were perfectly satisfied with the loan and the arrangements as they then existed; that the loan was not due and it was entirely agreeable that they should continue under the arrangements that existed at that time. Petitioner finally prevailed upon the Collbran-Bostwick Development Company to accept payment of the loan and release of the collateral for a payment of $12,500 in addition to all amounts due under the loan, which sum was paid to said company for the release of the loan and capital stock of the Olinger Mortuary Association held as collateral and for the further consideration of taking Collbran off the pay roll of Olinger Mortuary Association at $250 per month. At or about this same time $8,250 was paid to Frank W. Farmer by crediting the said amount which he was due for stock which he had agreed to purchase in the Olinger1931 BTA LEXIS 1738">1745 Mortuary Association and had agreed to pay for on the installment plan. This sum was paid because Farmer could not be reconciled to the large sums that were being paid for the release of the capital stock of the Olinger Mortuary Association by the Collbran-Bostwick Development Company. Farmer was complaining and to satisfy him it was agreed that his account be credited in the sum of $8,250. In October, 1924, the sum of $15,000 was paid to Ben Grimes in purchase and settlement of the contract with him, already referred to in these findings of fact. When the stock in the Olinger Mortuary Association, which was held as collateral by the Collbran-Bostwick Development Company, was procured from the last named corporation by the petitioner, the Imperial Investment Company, it then put up said stock as collateral security to the American National Bank for the $180,000 which the bank was lending to the Imperial Investment Company to pay off these various obligations and secure release from these various contracts and agreements. The money was received from the bank and so used by the Imperial Investment Company. OPINION. BLACK: Both petitioners allege that respondent erred in1931 BTA LEXIS 1738">1746 overstating net income, due to the disallowance of commission expense in the amount of $33,047.59. The facts developed at the hearing show that the above amount claimed by petitioners as a deduction on their consolidated income-tax return, plus certain minor adjustments not in dispute, make up a total of $35,750 and consists of 23 B.T.A. 1282">1286 $8,250 credited to Frank W. Farmer by the Imperial Investment Company on its books, $15,000 which the Imperial Investment Company paid Ben Grimes in 1924, and $12,500 which was paid to the Collbran-Bostwick Development Company in 1924. Petitioners treat all three of these expenditures as part of the expense in procuring the release of the loan and collateral previously deposited with the Collbran-Bostwick Development Company and lump them together and take all as an expense deduction in 1924. Respondent disallows this and treats all these items as expenses connected with petitioners' procuring the $180,000 loan from the American National Bank in October, 1924, and amortizable over the life of such loan. Respondent has prorated this amount on a three-year basis and has apportioned $2,702.40 of such expense to cover the period October 10, 1924, to1931 BTA LEXIS 1738">1747 December 31, 1924. This is the period of time included in the taxable year before us, during which time the loan of $180,000 was in force. We do not agree with petitioners' treatment of these deductions nor do we agree with respondent's treatment of them. The $8,250 payment made to Frank W. Farmer is not, in our judgment, a proper expense item. He had contracted to purchase a three-tenths interest in the Olinger Mortuary Association and to pay for same on the installment plan. He was complaining about the $12,500 which was being paid to Collbran-Bostwick Investment Company for cancellation of its contract and return of collateral and, in order to satisfy him and secure his acquiescence in the transaction, the Imperial Investment Company agreed to and did credit him with $8,250 on its books in part payment of the stock which he had contracted to purchase. We know of no provision of the applicable revenue act and we are cited to none which will permit a corporation to deduct as ordinary and necessary business expenses, in determining its net income for the taxable year, amounts which it has paid to a disgruntled monority stockholder to secure his acquiescence in business transactions1931 BTA LEXIS 1738">1748 which he does not approve. This item of $8,250 paid to Farmer is not an allowable deduction for any year and respondent should not so treat it in redetermining the deficiency. Forty-four Cigar Co.,2 B.T.A. 1156">2 B.T.A. 1156. The next item for our consideration is the payment of $15,000 to Grimes in 1924 under the circumstances and for the considerations which we have already detailed in our findings of fact. We think this was a capital transaction and therefore not an allowable deduction. Undoubtedly where an individual or a corporation taxpayer makes expenditures for the purpose of getting some one to guarantee the payment of taxpayer's bonds or other evidence of indebtedness, the sum of such expenditures is a proper part of the cost of procuring 23 B.T.A. 1282">1287 the money which the indebtedness represents and is amortizable over the life of the loan. Liberty Farms Co.,22 B.T.A. 1298">22 B.T.A. 1298. So if when Bona secured the agreement of Grimes to guarantee the payment of his note to the American National Bank for $25,000, he had agreed to pay Grimes a certain sum of money, say $5,000, for such guaranty, this amount would have been a part of Bona's cost in procuring1931 BTA LEXIS 1738">1749 the $25,000 and would have been amortizable over the period of the loan, but he did not do it that way. What Bona agreed to pay Grimes in consideration of his guaranteeing to pay said note at maturity was 15 per cent of the profits of the Olinger Mortuary Association, after said $25,000 should be paid. In other words, Grimes became the beneficial owner of 15 per cent of the profits coming to Bona from the Olinger Mortuary Association. If no profits were made, Grimes got nothing. This agreement was made in 1921 and certainly Bona could not have accrued anything as a liability on his books by reason of his contract with Grimes. It was entirely uncertain whether Grimes would ever receive anything. He would receive anything only if and when the $25,000 note was paid to the American National Bank and if and when thereafter the Olinger Mortuary Company made profits, and then to the extent of 15 per cent of such profits. Under such a situation no liability could be accrued on account of the contract. S. Naitove & Co. v. Commissioner, 32 Fed.(2d) 949. In 1924, when the Imperial Investment Company, succeeding to the rights and assuming the liabilities of Bona, 1931 BTA LEXIS 1738">1750 paid Grimes $15,000 for the purchase and abrogation of the contract, it was a capital transaction and we fail to see where it has any proximate connection either as a part of the cost of paying off the Collbran-Bostwick Development Company loan or as a part of the cost of the $180,000 loan secured from the American National Bank in October, 1924. This payment of $15,000 to Grimes should not be allowed as a deduction in determining the deficiency. We come last to a discussion of the $12,500 payment which petitioner, the Imperial Investment Company, made to Collbran-Bostwick Development Company in the taxable year in order to get it to allow the payment to it of the balance on an indebtedness not yet due and thereby stop the payment to Collbran of $250 monthly salary which he was receiving from the Olinger Mortuary Association and for which he was performing no services and secure the release of the stock of the Olinger Mortuary Association which was being held as collateral to secure the loan. Petitioners, the Imperial Investment Company and Olinger Mortuary Association, at that time were being held to a very burdensome and restrictive contract which was entered into in 19211931 BTA LEXIS 1738">1751 with George W. Olinger, Inc., and George W. Olinger as an individual. 23 B.T.A. 1282">1288 Some of the terms of that contract have been set out in our findings of fact. Petitioners wanted to be released from it and found that they could get released from all these burdensome restrictions by borrowing $180,000 from the American National Bank and using the money to pay all the amounts due under the several contracts. But in order to get the money, the American National Bank required that petitioners deposit with it as collateral security all the stock of the Olinger Mortuary Association, except the three qualifying shares. This was already up as collateral, as we have stated, with the Collbran-Bostwick Development Company and in order to get it back petitioners paid the Collbran-Bostwick Development Company $12,500 for that purpose and the other purposes which we have already enumerated. In Higginbotham-Bailey-logan Co.,8 B.T.A. 566">8 B.T.A. 566, we held that upon the cancellation of a lease the owner of the fee merely acquires possession and does not acquire any new estate or asset which is exhaustible, and hence a payment made by him to secure cancellation of the lease and possession1931 BTA LEXIS 1738">1752 of the premises for use in his business is deductible as a business expense in the year of payment and may not be amortized over the unexpired term of the lease. In the instant case, petitioner, the Imperial Investment Company, was the owner of the stock of the Olinger Mortuary Association put up as collateral security with the Collbran-Bostwick Development Company for a loan. In October, 1924, it needed this stock badly for use in its business and paid the Collbran-Bostwick Development Company $12,500 for the consideration, among other things, of securing possession of this stock. We think under the authority of 8 B.T.A. 566">Higginbotham-Bailey-Logan Co., supra, petitioner is entitled to deduct said amount as an ordinary and necessary business expense incurred and paid in 1924 and does not have to amortize it over the period of the new loan negotiated with the American National Bank, as contended by respondent. Respondent is overruled respecting his contention as to this item. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620818/	GEORGE EMLEN ROOSEVELT, TRUSTEE OF THE ESTATE OF THEODORE ROOSEVELT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Roosevelt v. CommissionerDocket No. 48906.United States Board of Tax Appeals28 B.T.A. 194; 1933 BTA LEXIS 1155; May 31, 1933, Promulgated 1933 BTA LEXIS 1155">1155 1. Petitioner is the testamentary trustee of the residuary estate under the will of Theodore Roosevelt, who at the date of his death had a vested remainder interest in a testamentary trust created by the will of Cornelius V. S. Roosevelt. In 1925 petitioner received certain shares of stock from the Cornelius Roosevelt trust, some of which shares were in the trust at the date of Theodore Roosevelt's death and others of which had been purchased by Cornelius Roosevelt's trustees after Theodore Roosevelt's death. All of the stock was sold by petitioner in 1926. Held, that the petitioner acquired by bequest Theodore Roosevelt's remainder interest in the Cornelius Roosevelt trust as of the date of death of Theodore Roosevelt. 2. The determination of respondent in which he used the value on the date of Theodore Roosevelt's death of the shares held by the Cornelius Roosevelt trust on such date, and the cost to Cornelius Roosevelt's trustees of the stock acquired after Theodore Roosevelt's death, as the basis for determining gain or loss under section 204(a)(5) of the Revenue Act of 1926, is approved. Brewster v. Gage,280 U.S. 327">280 U.S. 327; Chandler v. Field, 63 Fed.(2d) 13.1933 BTA LEXIS 1155">1156 Edmund B. Quiggle, Esq., for the petitioner. Frank Schlosser, Esq., for the respondent. MATTHEWS 28 B.T.A. 194">195 This is a proceeding for the redetermination of a deficiency in income tax for the year 1926 in the amount of $621.65. The only issue is the correct basis to be used for the determination of gain from the sale of certain stocks and securities sold in 1926 by the taxpayer, one of the trustees of the trust created under the will of Theodore Roosevelt. FINDINGS OF FACT. The parties stipulated the facts as follows: I. Theodore Roosevelt died on January 6, 1919, a resident of the State of New York, leaving a will which was admitted to probate by the Surrogate's Court of Nassau County, New York, on or about March 1, 1919. A copy of the will is attached hereto as Exhibit A and made a part hereof. In said will, except for certain bequests of personal effects and the exercise of a power of appointment given to him by his father's will, Theodore Roosevelt devised and bequeathed his entire estate to his executors, in trust, to pay the entire net income to his wife, Edith Kermit Roosevelt, during her life. His wife is still living. By judgment1933 BTA LEXIS 1155">1157 of the New York Supreme Court entered on or about March 16, 1923, the accounts of the executors of Theodore Roosevelt showing the transfer of the principal of the estate to themselves as trustees as of May 31, 1922, were judicially settled and allowed. II. Cornelius V. S. Roosevelt died September 30, 1887, leaving a will which was admitted to probate by the Surrogate's Court of New York County, New York, on or about March 18, 1888. A copy of this will is attached hereto as Exhibit B and made a part hereof. III. Under said will of Cornelius V. S. Roosevelt he devised and bequeathed his residuary estate, both real and personal, to his executors, in trust, with broad powers in respect to the sale, investment and reinvestment of the principal, and power to lease, alter, repair, improve and build upon any or all of the real estate. The entire net income therefrom was to be paid to his wife, Laura H. Roosevelt, during her life. By the third clause of said will he bequeathed several annuities on and after the death of his wife, which he directed his executors to pay to the annuitants during their respective lives. By the fourth clause of his will, on the death of his wife, 1933 BTA LEXIS 1155">1158 he devised and bequeathed all his estate, real and personal, subject to the payment of said annuities, to certain of his nephews and nieces named in the will, one of these nephews being Theodore Roosevelt. IV. Numerous questions in connection with the will of Cornelius V. S. Roosevelt have been decided by the New York Supreme Court in actions brought from time to time by the executors and trustees. The widow of Cornelius V. S. 28 B.T.A. 194">196 Roosevelt died on March 20, 1900. On or about December 19, 1901, a judgment was entered by said Court in an action brought by the executors and trustees, holding, among other things, that in order to protect the annuities, they should retain the entire principal of the estate, paying out of the income the specified annuities and paying the balance of the income to the nephews and nieces, their legal representatives, or assigns; and holding further that the powers and authorities given by the will to the executors and trustees survived the death of the widow and continued. V. On or about November 14, 1908, a judgment was entered by the New York Supreme Court in another of said actions which contained a provision continuing the powers1933 BTA LEXIS 1155">1159 and authority of the executors and trustees of Cornelius V. S. Roosevelt in respect to selling, investing, and reinvesting the whole or any part of the principal of the estate, and the leasing, improving and repairing of the real estate, and requiring them to retain the principal as an entire fund for the production of the requisite income. Like provisions were contained in judgments entered by said Court in similar actions instituted in the years 1912 and 1922. VI. In or about April, 1925, after two of the annuitants mentioned in the will of Cornelius V. S. Roosevelt had died, the executors and trustees instituted another action in the New York Supreme Court, having as one of its purposes the releasing of a portion of the principal which the Court had theretofore ordered to be held intact. The judgment which was entered therein on or about December 30, 1925, ordered the retention of a specified portion of the principal which, in the opinion of the Court, was sufficient to assure the payment of the unexpired annuities, and ordered a distribution of the remaining principal to the nephews and nieces named in the will of Cornelius V. S. Roosevelt who survived him, their representatives, 1933 BTA LEXIS 1155">1160 or assigns, stating specifically the fractional shares of that part of the principal to be distributed that each of the parties in interest was entitled to receive, one-tenth of the same being distributable to Edith Kermit Roosevelt, Theodore, roosevelt and George Emlen Roosevelt, as executors of and trustees under the last will and testament of Theodore Roosevelt, deceased. VII. Pursuant to said judgment, there were distributed on December 31, 1925, by the executors and trustees under the will of Cornelius V. S. Roosevelt to the executors and trustees under the will of Theodore Roosevelt, certain shares of common and preferred stock of various corporations, as listed in paragraph XII of this Agreed Statement of Facts. Said securities were sold by the executors and trustees under the will of Theodore Roosevelt in the year 1926 for the sum of $41,157.79. VIII. The executors and trustees under the will of Cornelius V. S. Roosevelt, deceased, in the period from the date of his death in 1887 until December 30, 1925, during which time they were required by the New York Supreme Court to hold the entire principal intact as one fund, made numerous sales, 28 B.T.A. 194">197 changes, investments1933 BTA LEXIS 1155">1161 and reinvestments in respect to the trust fund. Some of the securities distributed on December 31, 1925, by the said executors and trustees were left by Cornelius V. S. Roosevelt as part of his estate; others of them were acquired by said executors and trustees after his death and before the death of Theodore Roosevelt; and still others of them were acquired by said executors and trustees after the death of Theodore Roosevelt. IX. In making a distribution under the aforesaid judgment of December 30, 1925, the executors and trustees under the will of Cornelius V. S. Roosevelt had authority to distribute in kind the securities released by said judgment or to sell them and distribute the proceeds. In making a distribution in kind, as was done by them, they had broad discretion in selecting the particular securities to be distributed to any particular distributee, provided such distributee received the proportion to which he was entitled of the entire value of the property distributed. X. For the calendar year 1926 the estate of Theodore Roosevelt by George Emlen Roosevelt, trustee, made two returns, one a fiduciary return on Form 1041 prescribed by the Treasury Department, 1933 BTA LEXIS 1155">1162 and one an income tax return for the estate as an individual on Form 1040. The fiduciary return showed the total income payable to the testator's widow and also showed the estate itself as a beneficiary for the amount of profit realized on the sale of the aforesaid securities. The return on Form 1040 showed this profit amounting to $3,015 as taxable to the estate and computed and paid the tax thereon. XI. The profit of $3,015 from the sale of these securities, as shown on said return, was computed by using as the basis the fair market value of the securities on December 31, 1925, when they were received by the trustees of the estate of Theodore Roosevelt. The notice of deficiency increased said profit by the amount of $13,358.04 by substituting as the basis in computing the profit the value on January 6, 1919 of those securities found by the respondent to have been acquired by the estate of Cornelius V. S. Roosevelt on or prior to that date, and the cost to that estate of those securities found by the respondent to have been acquired by the estate after January 6, 1919. XII. The fair market value of each class of said securities on December 31, 1925, is that shown below1933 BTA LEXIS 1155">1163 in the column headed "Fair Market Value on Dec. 31, 1925". The fair market value on January 6, 1919, of that part of said securities acquired by the estate of Cornelius V. S. Roosevelt on or prior to that date and/or the cost to the estate of that part of said securities acquired by it after January 6, 1919, are as shown below in the column headed "Cost or Value on Jan. 6, 1919". The amount by which the profit from the sale of each class of said securities reported on the income tax return of the estate of the Theodore Roosevelt was increased in said notice of deficiency is as shown below in the column headed "Increase in Profit." Fair MarketCost or Increase in Value on Value onProfit.Dec. 31, Jan. 6, 1925.1919.3 3/10 shares All American Cable$432,30$253.18$179.127 1/5 shares Bank of Manhattan1,713.60600.001,113.6036 shares Chemical National Bank25,632.0016,200.009,432.0039 9/10 shares Consolidated Gas Co3,790.501,944.681,845.8220 shares Southern Railway Preferred1,850.001,380.00470.0040 shares Southern Atlantic Tel. Co860.00640.00220.0020 shares Union Pacific Co. Preferred1,505.001,445.0060.0025 shares Atchison Topeka & Santa Fe2,359.392,321.8937.50Total$38,142.79$24,784.75$13,358.041933 BTA LEXIS 1155">1164 28 B.T.A. 194">198 Exhibits A and B are the wills of Theodore Roosevelt and Cornelius V. S. Roosevlet, respectively, which are incorporated herein by reference. It is not necessary to set them forth in full, as the material parts are summarized in the above stipulation. OPINION. MATTHEWS: The petitioner is the testamentary trustee of Theodore Roosevelt, who died on January 6, 1919, domiciled in New York. The only question involved is the basis to be used in determining gain or loss on the sale by the trustee in 1926 of certain stock received by him on December 31, 1925, from the trustees of the testamentary trust created by Cornelius V. S. Roosevelt, who died in 1887. Cornelius gave his widow a life estate with remainder over, such remainder interests being charged with the payments of certain annuities. Theodore Roosevelt was one of the remaindermen. The widow died in 1900. The Supreme Court of New York decreed that the trust survived the life tenant's death; that the corpus should be retained by the trustees with the same powers to sell and reinvest as they had had during the life tenant's life; and that the trustees should pay the annuities out of the income of the trust1933 BTA LEXIS 1155">1165 and distribute the balance of the income to the remainderman. After the death of two of the annuitants the court, on December 30, 1925, authorized a part of the corpus to be distributed to the remainderman. It was Theodore Roosevelt's share of the amount distributed which the trustee of his residuary estate received on December 31, 1925. Under section 204(a)(5) of the Revenue Act of 1926, the basis for determining gain or loss on the sale of property acquired by bequest, devise or inheritance is the fair market value of such property at the date of acquisition. At the time of his death, Theodore Roosevelt had a vested remainder interest in the trust res of the Cornelius Roosevelt trust. At his death this interest became a part of his estate and passed to his testamentary trustees. The trustees were devisees of the residuary estate, which was distributed to them on May 31, 1922. 28 B.T.A. 194">199 Under the principle of , "the legal title [to the residuary estate] so given [by the decree of distribution] relates back to the date of death." 1933 BTA LEXIS 1155">1166 . Therefore, the date of acquisition by petitioner of Theodore Roosevelt's remainder interest in the Cornelius Roosevelt trust was the date of death of Theodore Roosevelt. By virtue of having acquired Theodore Roosevelt's remainder interest in the Cornelius Roosevelt trust, the petitioner received in 1925 from that trust certain shares of stock. These shares were sold in 1926. The question is, What was the date of acquisition by petitioner of the stock sold in 1926? The petitioner contends that the date of acquisition was the date of distribution to him in 1925; the respondent contends that the time of acquisition was the date of Theodore's death in 1919, and uses as a basis the value of the stocks on such date, except as to stocks bought by Cornelius's trustees after Theodore Roosevelt's death, where he would use cost to Cornelius's trustees. Since the corpus of the Cornelius Roosevelt trust had changed in form from time to time by investment and reinvestment, the petitioner complains that respondent's method will result in inequalities since Theodore, while living, and his trustees after his death, had no right1933 BTA LEXIS 1155">1167 to particular stock, but only to a pro rata share of the whole corpus. The applicability here of the general principle laid down by the Supreme Court in , is also denied, since that case did not involve an intervening trust between decedent and legatee. This Board in , and in , and the Circuit Court of Appeals for the First Circuit in ,, considered the question as to the time of acquisition by the remainderman of property held in a testamentary trust. The same principle is involved in the instant case. In all three cases the principles of , were followed and it was held that the time of acquisition was the date of death of the testator from whom the right was acquired. In the Griscom and Huggett cases, the contention had been made that the time of acquisition was at the death of the life tenant and that the value of the property at the death of the life tenant was the basis for valuing the property received by the remainderman. 1933 BTA LEXIS 1155">1168 In the Chandler case, it was contended that the date of distribution to the remainderman was the date of acquisition, and value on such date was the proper basis to be used. In each case the testamentary trustees had the power to sell and reinvest, and it was argued that because of such power the remainderman might not receive the same property as the decedent left. In 28 B.T.A. 194">200 each case it so happened that the remainderman did receive the identical property left by the decedent. In the Huggett case, the respondent had contended and we held that the value of the remainderman's interest in the property as of the date of the death of the testator, and not the value of the property itself at that date, should be used as the basis. On appeal of the Huggett case to the Court of Appeals of the District of Columbia, our decision was modified to the extent of holding that it was error to reduce the value of the property at the basic date by the value of the interest of the life tenant. We have no such question here, inasmuch as the respondent has used as a basis the value of the property itself. Under the principle of 1933 BTA LEXIS 1155">1169 , and the application thereof by the Board in the Griscom and the Huggett cases, and by the court in Chandler v. Field, the general rule is that title to property received by a remainderman relates back to the date of death of the testator from whom such right was acquired. Under this rule, the title to stocks received by petitioner in 1925 which had been held by the Cornelius Roosevelt trust at the date of Theodore Roosevelt's death relates back to Theodore Roosevelt's death. Therefore, we affirm the action of the respondent in using the value of such stock on January 6, 1919, the date of Theodore Roosevelt's death, as the basis for determining the gain or loss on the sale of such stock. In the instant case, the Cornelius V. S. Roosevelt trustees had the power to sell and reinvest, and did sell and reinvest, a part of the corpus; and some of the stocks received by petitioner were acquired by the Cornelius Roosevelt trust after Theodore Roosevelt's death. As to these stocks, the Commissioner used the cost to the Cornelius Roosevelt trust as the basis to be used by petitioner. This means that the date of acquisition1933 BTA LEXIS 1155">1170 by the remainderman (petitioner) was the date of purchase by the Cornelius Roosevelt trust. We think this is correct. As said above, the title to property devised or bequeathed to a testamentary trustee relates back to the date of death of testator. If the trustee sells any of the trust property for a price in excess of value at date of acquisition, a taxable gain is realized. That is a closed transaction as to such property. Neither remainderman nor trustee has any further interest in it. If the proceeds are used in the purchase of other property, the date of acquisition of such property by the trustee is the date of purchase and the basis in the trustee's hands is cost. The remainderman's interest in the property is acquired at the same time as the trustee acquires legal title to the property. Therefore, when such property is distributed to the remainderman 28 B.T.A. 194">*201 his legal title relates back to the time he acquired his remainder interest in the property, namely the date of acquisition by the trustee. The determination of respondent is approved. Reviewed by the Board. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620821/	GARY and VICTORIA ANTZOULATOS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAntzoulatos v. CommissionerDocket No. 2958-74United States Tax CourtT.C. Memo 1975-327; 1975 Tax Ct. Memo LEXIS 47; 34 T.C.M. 1426; T.C.M. (RIA) 750327; November 5, 1975, Filed Gary Antzoulatos, pro se. Clifford C. Larson, for the respondent. STERRETTMEMORANDUM FINDINGS OF FACT AND OPINION STERRETT, Judge: The respondent determined a deficiency in petitioners' federal income tax for the calendar year 1972 in the amount of $589.26. The deficiency is based solely upon the disallowance by respondent of a deduction for educational expenses incurred by petitioner, Gary Antzoulatos, to qualify as a registered pharmacist. We must decide the correctness of respondent's determination. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibit attached thereto, are incorporated herein by this reference. Petitioners Gary Antzoulatos (hereinafter1975 Tax Ct. Memo LEXIS 47">48 petitioner) and Victoria Antzoulatos are husband and wife. They were residents of Van Nuys, California at the time they filed their petition herein. Petitioners filed a timely 1972 joint federal income tax return with the district director of internal revenue, Los Angeles, California. Under California state law, to practice as an intern pharmacist one must meet certain minimum educational requirements and must possess a valid intern card issued by the California State Board of Pharmacy. Once an intern card has been issued, a prerequisite to its continued validity is the holder's registration at an accredited college of pharmacy. Petitioner was issued an intern card and in 1971 began his tenure as an intern pharmacist in a hospital, a position he retained during 1972. In this capacity his primary duties were to fill and compound prescriptions, and to consult with doctors. However, as required by Cal. Bus. & Prof. Code sec. 4097 (West 1974), his performance thereof was supervised by a registered pharmacist. That section reads: SEC. 4097. Performance of duties by intern pharmacist; regulations; supervision An intern pharmacist may perform such activities pertaining to the1975 Tax Ct. Memo LEXIS 47">49 practice of pharmacy as the board may determine by regulation. Whenever in this chapter the performance of an act is restricted to a registered pharmacist, such act may be performed by an intern pharmacist under the supervision of a registered pharmacist. An intern pharmacist may perform such activities pertaining to the practice of pharmacy as the board may determine provided that at the time of performing such acts he was under the immediate, direct and personal supervision of a registered pharmacist, and provided further, that such registered pharmacist shall not supervise more than one intern pharmacist at any one time. Under California state law, in effect for 1972, to qualify for the issuance of a certificate as a registered pharmacist one must fulfill among other conditions the following: (1) graduation from a college of pharmacy, and (2) completion of 1 year of practical experience in a pharmacy. 1 Generally, the tasks performed by a registered pharmacist are similar to those performed by an intern pharmacist. However, a registered pharmacist may perform such tasks without supervision and possesses a far greater scope of authority than does an intern pharmacist. 1975 Tax Ct. Memo LEXIS 47">50 During 1972, while employed as an intern pharmacist, petitioner was enrolled in the School of Pharmacy of the University of Southern California. In connection with these studies, which enabled him ultimately to qualify as a registered pharmacist, petitioner incurred the following educational expenses: Tuition$2,600Parking38Books200Mileage570$3,408 Petitioners claimed, and respondent disallowed, a deduction for these expenses on their 1972 income tax return. The deductibility of these expenses is the only issue before us. OPINION Section 162(a), I.R.C. 1954, 2 provides for the deduction of the ordinary and necessary expenses incurred in carrying on a trade or business. While the Code nowhere deals directly with educational expenditures, the deductibility of such expenditures is provided for in section 1.162-5, Income Tax Regs., as amended by T.D. 6918, 1967-1 C.B. 36. This regulation, in pertinent part, states: (a) General rule. Expenditures made by an individual for education (including research undertaken as part of his educational program) which are not expenditures of a type described in paragraph (b) (2) or (3) of this1975 Tax Ct. Memo LEXIS 47">51 section are deductible as ordinary and necessary business expenses (even though the education may lead to a degree) if the education-- (1) Maintains or improves skills required by the individual in his employment or other trade or business, or (2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation. (b) Nondeductible educational expenditures-- (1) In general. Educational expenditures described in subparagraphs (2) and (3) of this paragraph are personal expenditures or constitute an inseparable aggregate of personal and capital expenditures and, therefore, are not deductible as ordinary and necessary business expenses even though the education may maintain or improve skills required by the individual in his employment or other trade or business or may meet the express requirements of the individual's employer or of applicable law or regulations. (2) Minimum educational requirements. (i) The first category of nondeductible educational expenses within the scope of subparagraph1975 Tax Ct. Memo LEXIS 47">52 (1) of this paragraph are expenditures made by an individual for education which is required of him in order to meet the minimum educational requirements for qualification in his employment or other trade or business. * * (3) Qualification for new trade or business. (i) The second category of nondeductible educational expenses within the scope of subparagraph (1) of this paragraph are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business. 3 * * * Petitioner contends that his pharmaceutical education improved his skills germane to his employment as an intern pharmacist. He argues further, citing somewhat inexplicably as authority our decision in William D. Glenn,62 T.C. 270">62 T.C. 270 (1974),1975 Tax Ct. Memo LEXIS 47">53 that intern and registered pharmacists are engaged in the same trade or business. He concludes, therefore, that his studies at the University of Southern California did not qualify him to pursue a new trade or business and that the expenses incurred in connection therewith are deductible under the aforenoted regulation. Respondent takes the position that these educational expenses were incurred to qualify and prepare petitioner in a new trade or business, that of a registered pharmacist. In support thereof, he points to the wide disparity between the scope of authority possessed by intern and registered pharmacists under California law. He also urges that petitioner's employment as an intern pharmacist, rather than constituting a trade or business within the meaning of section 162(a) represented a temporary position designed to provide petitioner with the practical experience necessary to become a registered pharmacist under California law. We think it obvious that petitioner's education improved his pharmaceutical skills. However, if his course of study was such as to lead to his qualification in a new trade or business, any expenses incurred in connection therewith are nondeductible1975 Tax Ct. Memo LEXIS 47">54 personal and capital expenditures notwithstanding this fact. Jeffry Weiler,54 T.C. 398">54 T.C. 398 (1970). Consequently, since petitioner's education led to his qualification as a registered pharmacist, we must decide whether or not the trade or business of a registered pharmacist is separate and distinct from that of an intern pharmacist. Relevant to such inquiry is the case of William D.62 T.C. 270">Glenn,supra. In Glenn, the taxpayer, a licensed public accountant, incurred educational expenditures in preparation for the examination required to be taken by candidates for a certified public accountant's license. In holding these expenses to be nondeductible expenditures which qualified the taxpayer in a new trade or business, we stated: We have not found a substantial case law suggesting criteria for determining when the acquisition of new titles or abilities constitutes the entry into a new trade or business for purposes of section 1.162-5(c)(1), Income Tax Regs. What has been suggested, and we uphold such suggestion as the only commonsense approach to a classification, is that a comparison be made between the types of tasks and activities which the taxpayer1975 Tax Ct. Memo LEXIS 47">55 was qualified to perform before the acquisition of a particular title or degree, and those which he is qualified to perform afterwards, Ronald F. Weiszmann,52 T.C. 1106">52 T.C. 1106, 52 T.C. 1106">1110 (1969), affd. 443 F.2d 29 (C.A. 9, 1971). Where we have found such activities and abilities to be significantly different, we have disallowed an educational expense deduction, based on our finding that there had been qualification for a new trade or business. 52 T.C. 1106">Ronald F. Weiszmann,supra.In the instant case, we find that the differences in potential scope of practice between a public accountant and a C.P.A. in Tennessee are significant, and that petitioner's expenses were incurred in attempting to qualify for a new trade or business. Hence, we hold that the expenses described above are nondeductible. [William D. Glenn,62 T.C. 270">62 T.C. 270, 62 T.C. 270">275 (1974)]After carefully considering the evidence in light of the principles set forth in Glenn, we conclude that the trades or businesses of intern and registered pharmacists are significantly different, and that by fulfilling the statutory requirements to practice the latter petitioner has qualified1975 Tax Ct. Memo LEXIS 47">56 in a new trade or business. We note that petitioner himself testified that there existed a wide chasm between the authority and scope of practice of registered and intern pharmacists which petitioner could bridge only by fulfilling the statutory prerequisites for receipt of a registered pharmacist's certificate. As previously noted, one such prerequisite is the receipt of a degree from a college of pharmacy. In this connection we find it significant that petitioner, as a registered pharmacist, may now lawfully operate his own pharmacy whereas in the capacity of intern pharmacist he was without authority to fill a single prescription absent the supervision of a registered pharmacist. The common sense of the matter is that petitioner's education and internship were part of an integrated plan which was designed to and which did lead to his qualification as a registered pharmacist. In this respect petitioner's situation is not unlike that of a candidate for a Doctor of Philosophy degree who is also a teaching fellow. While such candidate's graduate education is clearly beneficial to his teaching skills, both his education and his teaching duties constitute a single program of study qualifying1975 Tax Ct. Memo LEXIS 47">*57 the candidate for a new trade or business thereby rendering his educational expenses nondeductible. Arthur M. Jungreis,55 T.C. 581">55 T.C. 581 (1970). In view of the foregoing, Decision will be entered for the respondent.Footnotes1. Cal. Bus. & Prof. Code↩ sec. 4085 (West 1974).2. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended. ↩3. We have previously upheld the validity of this regulation and petitioner has not contested the validity of its application to the facts presented herein. See Ronald F. Weiszmann,52 T.C. 1106">52 T.C. 1106 (1969), affd. 443 F.2d 29↩ (9th Cir. 1971).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620822/	FARMVILLE OIL AND FERTILIZER COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Farmville Oil & Fertilizer Co. v. CommissionerDocket No. 67600.United States Board of Tax Appeals30 B.T.A. 1048; 1934 BTA LEXIS 1235; June 26, 1934, Promulgated 1934 BTA LEXIS 1235">1235 A charge to "reserve for inactive contingencies" which includes possible discounts and other subsequent adjustments of prices on sales, held, not to be deductible as such, and no part thereof, upon the evidence, to be deductible as an addition to a reserve for bad debts. W. F. Evans, Esq., for the petitioner. Samuel L. Young, Esq., for the respondent. STERNHAGEN 30 B.T.A. 1048">1048 Respondent determined a deficiency of $1,885.97 in petitioner's income tax for the fiscal year ended July 31, 1930. Petitioner assails the disallowance of a deduction of $20,859.70 out of $21,545.42, representing a reserve for inactive contingencies. FINDINGS OF FACT. Petitioner, a North Carolina corporation with its principal office at Farmville, is engaged in the manufacture, principally, of tobacco fertilizer and, to some extent, cottonseed oil. In the territory served by the petitioner tobacco is the principal crop grown. Its factory is located in the largest tobacco-producing county of North Carolina. In, and prior to, the taxable year 1930 petitioner kept its books and made its income tax returns on an accrual basis. It kept a reserve for bad debts called1934 BTA LEXIS 1235">1236 "reserve for doubtful accounts and losses." In 1932, with the consent of the respondent, it changed its accounting for bad debts from the reserve method to the charge-off method. It also kept an account called "fertilizer discount", to serve as a record of cash discounts, trade discounts, and price adjustments allowed to purchasers of fertilizer, which was annually cleared to profit and loss account as an offset to fertilizer sales. In the fiscal years 1925, 1926, and 1927 the amounts added to the reserve for doubtful accounts and losses were approximately 6 to 8 percent of the outstanding accounts and notes receivable. In the fiscal year 1929, when the tobacco crop failed, the petitioner added to the reserve approximately 12 percent. Although this was more than its previous experience justified, the amount was allowed by the Commissioner as a deduction in computing taxable net income. The total accounts charged against the reserve in that year as worthless and uncollectible amounted to $78,597.57. The total accounts and notes receivable relating to the business of that year amounted to $439,310.39, of which only $210,416.49 was collected up to August 15, 1930, twelve and one1934 BTA LEXIS 1235">1237 half months after the close of the year. 30 B.T.A. 1048">1049 In the taxable year there was a decline in the average market price of tobacco to 12 cents, from an average of 18 cents in fiscal 1929, and a decline in the average market price of cotton. The outstanding accounts and notes receivable as of the close of the year amounted to $990,736.08. The petitioner added $64,405.44 to the reserve for doubtful accounts and losses and deducted that amount in the return, and the deduction has been allowed by the respondent. Accounts charged off as worthless and uncollectible in the year amounted to $101,638.22. Collections during the year on accounts charged off as bad debts in prior years amounted to $6,502.72. It is the petitioner's accounting practice to credit its fertilizer sales and charge its customers therefor according to its retail price schedule for credit sales of small losts. When the customers settle their accounts in the following year, adjustments thereof are made for cash, trade, quantity, dealers' and jobbers' discounts, and price corrections. The amount of the price corrections is dependent upon the prices established by petitioner's competitors. At the close of the1934 BTA LEXIS 1235">1238 taxable year, the petitioner charged fertilizer discount account and credited reserve for inactive contingencies, in the sum of $21,545.42, for discounts and price corrections on a selected list of accounts. The amount thus added to the reserve, representing approximately 10 percent of the total of accounts to which it applied, was deducted from gross sales in the return, and the respondent has disallowed the deduction to the extent of $20,859.70. After the close of the taxable year the petitioner allowed in respect of the particular accounts total discounts of $5,252.70, and ascertained $57,778.43 of the accounts to be worthless and uncollectible. Some undisclosed portions of the 1926, 1927, and 1928 additions to the reserve for doubtful accounts and losses were disallowed by respondent as deductions from the income of those years. The total bad debts charged off in 1932 exceeded the balance in the reserve and the $21,545.42 deducted from gross sales of the taxable year by approximately $10,000, and this excess was deducted from 1932 income. After the petitioner changed its basis of accounting for bad debts in 1932, additional accounts relating to business prior to the change1934 BTA LEXIS 1235">1239 were ascertained to be worthless and uncollectible, and all such accounts have been deducted in its income tax returns. OPINION. STERNHAGEN: The petitioner, having for the fiscal year ended July 31, 1930, charged to "fertilizer discount account" and credited to "reserve for inactive contingencies" $21,545.42, which it deducted on its tax return, used this amount as a reduction of gross sales in arriving at the gross income shown upon its return. The Commissioner 30 B.T.A. 1048">1050 in effect disallowed $20,859.70 of this amount and restored so much to gross income. Strictly speaking, therefore, the disallowance of the Commissioner is not of a statutory deduction. The petitioner, however, in assailing the Commissioner's determination argues that the amount in controversy is properly a statutory deduction of either an addition to its reserve for bad debts or to its reserve for inactive contingencies, or partly both. That a reserve for inactive contingencies such as possible repayments, price discounts, or price rebates, the amounts of which have not been fixed or were not fairly susceptible of ascertainment prior to the end of the taxable year in question, is not the basis of a1934 BTA LEXIS 1235">1240 statutory deduction has now become a settled doctrine. . This general doctrine includes the disallowance of unascertained price discounts, for the Supreme Court expressly disapproved , which held to the contrary. Thus, by its title alone the reserve for inactive contingencies, reflecting as it did "fertilizer discounts" would be no basis for the deduction claimed. The petitioner argues that, of the amount originally deducted, some part (said without supporting evidence to be $16,292.72) was an additional reserve for bad debts. Since the evidence fails to support this as a proper accounting classification and since also the amount of the allocation of such part is without supporting evidence, the petitioner must fail. The method of accounting for bad debts through a reserve does not found an absolute right in the taxpayer, for the statute expressly sanctions the Commissioner's discretion. Cf. 1934 BTA LEXIS 1235">1241 . Here the Commissioner's determination has clearly not been arbitrary or capricious. The taxpayer has been permitted during the preceding years to make substantial increases in the ratio of its bad debt reserve to its receivables. First, it had established this ratio at an amount varying between 6 and 8 percent. Later this was increased to 12 percent. In the taxable year 1930, that now in question, the taxpayer was permitted to add a further $64,405.44, arrived at by its own estimate at the end of the taxable year of the collectibility of specific accounts. Apparently when this permissive increase was allowed by the Commissioner it was not suggested that the reserve for inactive contingencies might include any further reserve for bad debts. But the petitioner, after the end of the taxable year and after its return was filed, discovered that its collections would be even less than the amount contemplated when the return was filed. In this proceeding it sought by the evidence of actual subsequent collections to establish the propriety of treating its reserve for inactive contingencies as an additional reserve for bad debts. This1934 BTA LEXIS 1235">1242 we think is contrary to the intendment of the statute and 30 B.T.A. 1048">1051 the regulations. While a bad debt reserve may and properly should be permitted to fluctuate from time to time in accordance with actual experience and well founded prophecy, cf. , the amount of the addition must be fixed at the approximate end of the taxable year. There is no support for the view that such a reserve may later be retroactively enlarged because the subsequent realization upon the debts has proved to be less than the estimate made at the close of the year. Such an unexpected development should be taken care of by the taxpayer, either by an enlargement of the subsequent annual additions to the reserve or by doing as this taxpayer did in 1932, giving up the reserve method entirely and deducting the debts as they are ascertained to be worthless and charged off. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620825/	Eleanor M. Lutz, et al., 1 Petitioners, v. Commissioner of Internal Revenue, RespondentLutz v. CommissionerDocket Nos. 2718-64, 2719-64, 2720-64United States Tax Court45 T.C. 615; 1966 U.S. Tax Ct. LEXIS 123; March 31, 1966, Filed 1966 U.S. Tax Ct. LEXIS 123">123 Decisions will be entered under Rule 50. 1. Partnership contracted to build military housing for the Government in the State of Washington under the Capehart Act. It reported its income under these contracts on an accrual and completed-contract basis of accounting. A question arose whether the Washington retail sales tax applied to the income under Capehart contracts. Arrangements were made with State tax commissioner whereby partnership reported its receipts under these contracts on its State excise tax returns and claimed deductions of same amounts; commissioner assessed the retail sales tax due on these receipts but agreed not to collect the tax pending the outcome of litigation instituted by other Capehart contractors contesting the applicability of the tax to income received under Capehart contracts. Partnership did not join in the litigation, accrued the amount of the tax on its books, and deducted it on its Federal tax returns for the years 1960 and 1962 when due, but did not pay the tax to the State of Washington or concede that it was due until termination of the litigation. Held, the Washington retail sales tax was not properly accruable in the years 1960 and 1962 and 1966 U.S. Tax Ct. LEXIS 123">124 could not be deducted in computing the taxable income of the partnership and the partners for those years.2. Held, subchapter S corporation is entitled to amortize and deduct amounts specifically allocated to covenants not to compete in contracts whereby the corporation bought certain insurance agency businesses. Donald C. Dahlgren and W. Paul Uhlmann, for the petitioners.Norman H. McNeil, for the respondent. Drennen, Judge. DRENNEN45 T.C. 615">616 Respondent determined deficiencies in income tax for the taxable years in question as follows:Docket No.PetitionerYearDeficiency2718-64Eleanor M. Lutz1960$ 29,320.011961512.50196233,106.072719-64E. W. Lutz and Helene B. Lutz196026,687.741961628.16196243,563.202720-64Philip B. Lutz and Shirley H. Lutz196025,202.971961478.32196230,942.31Certain issues raised in the pleadings have been abandoned or settled by agreement between the parties. The two issues remaining for decision are:(1) Whether certain liabilities for State of Washington retail sales tax were contingent, and therefore not properly accruable by the partnership, General Investment Co., during the taxable years in question.(2) Whether petitioners, shareholders in the General Mortgage Agency, 1966 U.S. Tax Ct. LEXIS 123">125 Inc., which elected to be taxed under subchapter S, are entitled to amortize the cost of covenants not to compete acquired by the corporation in connection with the purchase of four insurance agencies.GENERAL FINDINGS OF FACTThe stipulated facts are found as stipulated.Petitioner Eleanor M. Lutz resides in La Jolla, Calif., and filed her individual Federal income tax returns on a calendar year basis for the taxable years in question with the district director of internal revenue, Los Angeles, Calif.Petitioners E. W. Lutz and Helene B. Lutz are husband and wife, as are petitioners Philip B. Lutz and Shirley H. Lutz, all residing in Longview, Wash. They filed joint Federal income tax returns on a calendar year basis for the taxable years in question with the district director of internal revenue, Tacoma, Wash.Issue 1. Deductibility of Washington Retail Sales TaxFINDINGS OF FACTPetitioners are members of a family partnership known as the General Investment Co. of Longview, Wash. (hereinafter referred to as 45 T.C. 615">617 the partnership), the principal business activity of which was the construction of military and residential housing during the taxable years in question.The partnership kept its 1966 U.S. Tax Ct. LEXIS 123">126 books on the accrual basis of accounting and filed its Federal partnership returns (Form 1065) on a fiscal year basis for the fiscal years ended January 31, 1960, 1961, and 1962, with the district director of internal revenue, Tacoma, Wash.On August 21, 1958, the partnership was awarded the first of two contracts for construction of military housing units at Larson Air Force Base, Moses Lake, Wash. These contracts were awarded pursuant to the provisions of the Capehart Act of 1955 (Housing Amendments of 1955, tit. IV, sec. 403, 69 Stat. 635, 651, 42 U.S.C. sec. 1594) and are sometimes referred to herein as the Capehart contracts. The first contract provided for construction of 200 housing units and was completed by the partnership in its fiscal year ended January 31, 1960. The second contract was awarded May 10, 1960, and provided for construction of an additional 330 units. This second contract was completed during the partnership's taxable year ended January 31, 1962. For Federal income tax purposes the partnership reported its profit or loss from the construction contracts under the Capehart Act on the completed contract basis. Proceeds received under the first contract were 1966 U.S. Tax Ct. LEXIS 123">127 reported as gross income or sales for the partnership's fiscal year ended January 31, 1960, and proceeds received under the second contract were reported as gross income or sales for the partnership's fiscal year ended January 31, 1962. The partnership also reported costs incurred in the completion of these construction contracts in the years in which gross income was reported, and included as expenses were deductions for State of Washington retail sales tax on the first contract in the amount of $ 113,943.46, for the fiscal year ended January 31, 1960, and in the amount of $ 215,465.96 on the second contract for the fiscal year ended January 31, 1962. Their proportionate share of the net profit or loss of the partnership on these contracts was reported on the income tax returns of petitioners for the calendar years ended December 31, 1960 and 1962.Pursuant to the Capehart Act, the Secretary of Defense is authorized to contract with a builder to construct a military housing project on land leased from the Federal Government. The builder organizes a corporation to carry out the project and the corporation is granted a lease to the land by the Government. The corporation may obtain 1966 U.S. Tax Ct. LEXIS 123">128 funds with which to finance construction by mortgaging its leasehold interest, and the mortgage is eligible for FHA insurance. When construction is completed, responsibility for operation and maintenance of the housing project is transferred to the Secretary of Defense and all the stock of the corporation is also transferred to the Secretary of 45 T.C. 615">618 Defense, although the corporation remains in existence and continues to be the mortgagor.Although the construction contract is let to a corporation formed by the contractor, because of the close participation of the U.S. Government, a question arose as to the applicability of the Washington State retail sales tax to proceeds received under Capehart Act contracts.There were several contractors other than the partnership which were engaged in Capehart Act projects in the State of Washington prior to and at the time the partnership was awarded its first Capehart contract in August 1958. Certain of these contractors took the position that proceeds received under these contracts were not subject to the Washington State retail sales tax because the sale was made to the United States, and therefore the proceeds were exempt from the tax. In the 1966 U.S. Tax Ct. LEXIS 123">129 fall of 1957 one of the contractors involved submitted the question of applicability of the sales tax to Capehart contracts to the Tax Commission of the State of Washington for determination.The office of the attorney general for the State of Washington in an unpublished memorandum dated December 24, 1957, advised the State Tax Commission that in its opinion the State retail sales tax applied to the Capehart contracts. The attorney general concluded that the transaction involved was one between a private builder and a private corporation, that the financing corporation was a "consumer" under State law, and that the State retail sales tax attaches to a charge for construction performed for a consumer.Based on this opinion of the State attorney general and a subsequent opinion received from the State attorney general in April 1959, the State Tax Commission determined that the retail sales tax applied to Capehart contracts. Due to an expected court contest challenging the applicability of the retail sales tax to these contracts, the State Tax Commission decided to hold collection of the tax in abeyance pending final determination of the question. Subsequently in the spring of 1960 1966 U.S. Tax Ct. LEXIS 123">130 four of the Capehart contractors filed suits in the Superior Court of the State of Washington for Thurston County, contesting the applicability of the State retail sales tax on constitutional grounds, and asking that the State Tax Commission be permanently enjoined from collecting the retail sales tax on the proceeds of these contracts. The partnership considered joining the other contractors in litigating the tax but on the advice of its attorneys decided not to do so. The partnership was not a party litigant in these or any other court proceedings contesting the applicability of this tax, and did not contribute to the costs of the litigation conducted by the other contractors.Specifications published in connection with submission of bids on Capehart contracts provided that if there were any State sales taxes applicable to the contract price they would be the obligations of the bidder. The partnership computed the estimated retail sales tax and 45 T.C. 615">619 included this amount as an expense item in the preparation and submission of its bid for the two Capehart contracts received.After receipt of the first contract in August 1958 and prior to filing its initial State excise tax return covering 1966 U.S. Tax Ct. LEXIS 123">131 the first Capehart contract, the partnership requested authority from the State of Washington to withhold payment of the retail sales tax on the proceeds from this contract. The attorney general of the State of Washington granted such authority in a letter dated September 30, 1958. That letter provided in part as follows:This will serve as notice that it will not be necessary * * to report or remit any sales tax which may be due with respect to the above construction [Capehart Act construction at Larson Air Force Base] until such time as the Tax Commission shall notify you that such tax is payable. All penalties and interest will be waived until the Commission has reached its determination.Although payment of the sales tax had been deferred, the State of Washington required Capehart contractors to file returns and report sales, and as work progressed on the first contract, during 1958 and 1959, the partnership filed excise tax returns with the State of Washington on a bimonthly and quarterly basis. The returns covered both the business and occupation tax and the retail sales tax, and as application of the business and occupation tax was not subject to dispute the partnership 1966 U.S. Tax Ct. LEXIS 123">132 computed and paid the full amount of the business and occupation tax due on the gross income received under the Capehart contract during the period covered by the return. The partnership also reported these amounts as receipts for retail sales tax purposes but claimed a deduction in the same amount, resulting in no retail sales tax being reported as due on the proceeds of this contract. The deduction of the sales was itemized as "Sales to U.S. Government." The excise tax returns filed by the partnership reported total sales of $ 3,077,090.43 for the first Capehart contract.As work progressed on the second contract, during 1960 and 1961, the partnership filed Washington State excise returns on a regular basis. The manner of reporting income subject to the retail sales tax for the second Capehart contract was identical to that utilized under the first contract; total sales for the period were reported and a deduction was made for the total amount of sales reported, and this deduction was itemized as "Sales to U.S. Government." The returns filed by the partnership on its second contract reported total income of $ 5,386,648.94. These excise tax returns were filed by the partnership, 1966 U.S. Tax Ct. LEXIS 123">133 and the other Capehart contractors, in this manner pursuant to agreement with the State Tax Commission. This permitted the tax commissioner to audit the amounts reported by the contractors and issue assessments showing the amount of tax due.On May 11, 1960, after the four contractors had filed suit, the State Tax Commission issued a general administrative ruling announcing 45 T.C. 615">620 that the collection of retail sales tax on those four Capehart construction contracts, and any similar Capehart contracts, would be held in abeyance pending judicial determination of the pending cases. This action by the State Tax Commission was taken pursuant to the provisions of the Washington Revised Code, sec. 82.32.190. In addition to placing collection of the tax in abeyance, the ruling ordered that no interest or penalties would be collected in respect to the taxes so placed in abeyance, provided that in the event the commission should prevail in the pending litigation, the tax liability in question was paid in full in 90 days after final determination of the litigation. In arriving at this decision officials of the State Tax Commission were influenced by several factors including the fact that large 1966 U.S. Tax Ct. LEXIS 123">134 sums of money were involved, that if collections were made and a refund later required there might be an extensive impact on the general funds of the State, and that issuance of a refund would require payment of interest to the taxpayer.Despite issuance of the ruling of May 11, 1960, holding collection of the tax in abeyance, the Tax Commission continued to issue assessments to Capehart contractors, but on a deferred payment basis. The purpose of these assessments was to establish the correct amount of tax which was being held in abeyance. The State tax commissioner considered that liability for the retail sales tax arises at the time of sale, and the amount of the tax is held in trust by the taxpayer for the State of Washington.On August 29, 1960, the State Tax Commission issued an assessment against the partnership for retail sales taxes due on the first Capehart contract in the amount of $ 119,600.64, 2 plus interest in the amount of $ 4,408.48. The tax commissioner's letter of transmittal to the partnership stated in part as follows:The state's ability to tax income derived under this Act is presently being attacked in the courts and until the matter is decided the state has 1966 U.S. Tax Ct. LEXIS 123">135 been enjoined from collecting the taxes in dispute. We therefore have issued this assessment on a deferred basis pending the outcome of the litigation. At this time no request for payment of the tax is being made, the assessment has been prepared merely to complete our records. 3Subsequently, on August 16, 1961, this original assessment on the first contract was canceled and replaced by a new assessment for sales tax of $ 119,600.64 and interest of $ 3,806.47. The audit interest of $ 3,806.47 was later deleted from the assessment and only the retail sales tax due in the amount of $ 119,600.64 was ultimately paid by the partnership in a subsequent taxable year.During the period from May 11, 1960, when the Tax Commission issued its general abeyance order, to March 14, 1961, some of the Capehart contractors completed their projects and instituted proceedings 45 T.C. 615">621 through the secretary of state of the State of Washington for voluntary dissolution of their corporations, a procedure which requires clearance by the State Tax Commission before 1966 U.S. Tax Ct. LEXIS 123">136 dissolution can be completed. Due in part to findings resulting from investigations made in connection with corporations petitioning for dissolution the State Tax Commission determined that it would be in the best interest of the State if the previous general abeyance order was revoked with further abeyance orders to be granted only on an individual basis. The Tax Commission preferred to continue holding collection of the tax in abeyance for those contractors who could satisfy the Tax Commission that their financial position would permit such a procedure.On March 14, 1961, the Tax Commission revoked its general abeyance ruling of May 11, 1960, and stated that it would continue to hold collection of the tax in abeyance only in those cases where it could ascertain that further deferment would not place collection of the tax in jeopardy. This later ruling further provided that abeyance orders would be granted only upon receiving petitions from individual taxpayers. Pursuant to such ruling, on March 21, 1961, the partnership filed a petition requesting in writing that the Tax Commission hold collection of the retail sales tax on its first contract in abeyance pending the outcome of 1966 U.S. Tax Ct. LEXIS 123">137 the existing litigation.The State Tax Commission replied to this request on April 5, 1961, and indicated that continued abeyance and collection of the taxes due on the first contract would be considered only if adequate bond was posted. On April 17, 1961, the partnership proffered a form of personal bond to the State Tax Commission in the face amount of 1 1/2 times the amount of retail sales tax due on the first contract, which was signed by the partnership. 4 This bond was subsequently accepted by the State Tax Commission by letter dated June 29, 1961, and the State Tax Commission agreed to continue holding in abeyance collection of the retail sales tax due on the first contract of the partnership, contingent upon a satisfactory financial analysis of each of the individual sureties on the bond. This bond was later accepted unconditionally by the State Tax Commission. On August 16, 1961, the State Tax Commission issued a supplemental assessment against the partnership for retail sales tax due on its first Capehart contract in the amount of $ 1,238.19, together with interest 1966 U.S. Tax Ct. LEXIS 123">138 in the amount of $ 139.69. The audit interest of $ 139.69 was later eliminated and the retail sales tax due in the amount of $ 1,238.19 was ultimately paid by the partnership in a subsequent taxable year.On October 18, 1961, after the partnership had completed its second Capehart contract, the State Tax Commission issued an assessment 45 T.C. 615">622 for retail sales tax due on the second contract in the amount of $ 215,465.96. The partnership filed a petition similar to that filed with respect to the first contract requesting the State Tax Commission to hold collection of the assessment in abeyance pending outcome of the litigation. The bond filed by petitioners was accepted by the State Tax Commission by letter dated December 15, 1961, and it agreed to place collection of the retail sales tax on the second contract in abeyance pending outcome of the litigation.The State of Washington prevailed in proceedings before the trial court in a decision rendered in the Superior Court of the State of Washington for Thurston County on July 3, 1961, and the Capehart contractors who were parties to the litigation appealed this decision to the Supreme Court of the State of Washington. The decision of the 1966 U.S. Tax Ct. LEXIS 123">139 trial court was later affirmed by the State Supreme Court on August 1, 1963, in an opinion reported as Murray v. State, 62 Wash. 2d 619, 384 P.2d 337">384 P.2d 337 (1963). Thereafter the Capehart contractors who were parties to the action filed petition for writ of certiorari to the Supreme Court of the United States.On August 20, 1963, after the decision of the State Supreme Court, one of the partners and the attorney for the partnership visited the office of the secretary of the State Tax Commission in Olympia, Wash. The purpose of this meeting was to offer payment of the taxes in full on behalf of the partnership. The partnership had adequate liquid funds on hand with which to pay the taxes and desired to avoid imposition of interest on the amounts then due. Despite this offer of payment it was still the position of the State Tax Commission, for the reasons previously advanced, that collection of the tax should remain in abeyance until such time as the pending litigation was finally settled. As a result of this meeting a letter was sent from the office of the State Tax Commission to the attorney for the partnership, dated September 26, 1963, which stated in part as follows:The courts of the 1966 U.S. Tax Ct. LEXIS 123">140 State of Washington have upheld the right of the State of Washington to collect taxes of a similar nature against other Capehart contractors similarly situated. General Investment Co. has not and is not now prosecuting any action or taking any other steps to contest the tax. However, in order to eliminate the imposition of interest or penalty on the tax liability, General Investment Co. provided for payment of said tax liability in accordance with the requirements of the Tax Commission.This letter will confirm our understanding and agreement that neither interest nor penalty will be charged on either of said tax assessments until the litigation now pending, which is being prosecuted by persons other than General Investment Co. has been finally concluded or unless otherwise ordered by this Commission.On June 22, 1964, the petition of the litigating contractors for writ of certiorari to the Supreme Court of the United States was denied for lack of a substantial Federal question. ( Inland Empire Builders, 45 T.C. 615">623 v. Washington, 378 U.S. 580">378 U.S. 580 (1964).) Shortly thereafter the State Tax Commission requested payment of the retail sales tax due on the two Capehart contracts performed by the 1966 U.S. Tax Ct. LEXIS 123">141 partnership, and full payment of the amounts previously assessed by the Tax Commission was promptly made by the partnership on July 29, 1964. The Tax Commission waived all interest and penalties in accepting final payments of the assessment issued.During the period commencing with its first Capehart contract in August 1958 and continuing through the end of the second contract in June 1961, the partnership accrued liability for the retail sales taxes on its partnership books. However, the trial balances and profit and loss statements for these two projects prepared for the partnership in the field listed the amounts of sales tax due (as computed by the partnership) as expense items or liabilities under the caption "Sales Tax (in dispute)" and these were carried over onto the ledger accounts and the balance sheets in the same manner. According to petitioner E. W. Lutz these entries were made in this manner to explain why the liability was still carried on the books when the partnership had adequate cash and liquid assets on hand with which to pay the tax.On the balance sheet attached to the partnership information return (Form 1065) filed for the fiscal year ended January 31, 1960, 1966 U.S. Tax Ct. LEXIS 123">142 the sum of $ 113,943.46 was shown as a liability, with a footnote explaining that it represented sales tax claimed by the State in connection with a Government Capehart construction project which taxpayer is contesting. When this return was prepared, the partnership was considering whether it should join in the litigation which was about to be commenced by the other Capehart contractors, and the notation was inserted to explain why this liability was unpaid when it appeared that the partnership had adequate liquid resources to pay it. However, after consulting with its attorney, the partnership decided not to join with the other contractors in the suit. The attorney advised that if the partnership ever wanted to contest application of the tax, there would be other alternatives available, including filing a protest with the State Tax Commission against assessments if they were issued, or paying the tax and filing suit for refund. However, the partnership did not take any steps under either of these alternatives to contest the tax.On its partnership information return (Form 1065) filed for the fiscal year ended January 31, 1961, the balance sheet listed as a liability the sum of $ 1966 U.S. Tax Ct. LEXIS 123">143 113,943.46. A notation was added on the final page of the return indicating that this amount was "Reserve for State Sales Tax on Government Capehart Housing Contract which is being contested in Court and which the State has been enjoined from collecting."Similar entries were made in the partnership records and books with respect to the sales tax due on the second Capehart contract, in the 45 T.C. 615">624 amount of $ 215,465.96. However, on the information return (Form 1065) filed by the partnership for the fiscal year ended January 31, 1962, the amount of $ 215,465.96 was deducted for State sales tax as a part of the cost of goods sold, with no notation, and the balance sheet simply listed a liability for accounts payable in the amount of $ 356,963.96, which included the retail sales tax due the State on both Capehart contracts. There was no indication on the return that these amounts were in dispute.At no time did the partnership or any of its individual partners file any protest with the State Tax Commission concerning the amount or applicability of the retail sales taxes due on the Capehart contracts. At no time did the partnership or any of its individual partners institute court proceedings, 1966 U.S. Tax Ct. LEXIS 123">144 contesting either the amount or liability for the tax. Neither the partnership nor any of its individual partners ever contributed financially to any action being prosecuted by third parties contesting applicability of the tax. The partnership at all times had sufficient liquid assets available to pay the tax if it was demanded by the State.OPINIONThis first issue is whether petitioners are entitled to accrue and deduct on their Federal income tax returns for 1960 and 1962 the State of Washington retail sales taxes ultimately determined to be due on the Capehart Act contracts completed by their partnership in its fiscal years ending in 1960 and 1962. As set out in more detail in the above Findings of Fact, the partnership computed its income on the accrual method of accounting and reported it for Federal income tax purposes on the completed contract basis. The applicability of the State retail sales tax here involved to Capehart contractors was contested and litigated through the courts by four of the Capehart contractors operating in Washington during the years involved, which litigation finally terminated in favor of the State in 1964. While the partnership did not participate 1966 U.S. Tax Ct. LEXIS 123">145 in the litigation, arrangements were made with the State tax commissioner whereby the partnership reported the income it received under its two contracts on its State sales tax returns and claimed a deduction of the same amount, resulting in no tax being paid to the State on this income. The State tax commissioner computed the tax due on the gross income reported and assessed the tax but agreed not to collect it until the litigation conducted by the other contractors was terminated. Although the partnership did not pay the State tax at the time it filed its State tax returns, it did accrue the liability therefor on its books for the years involved and deducted the amount thereof in computing its income for Federal income tax purposes for those years. Petitioner paid all of the tax here involved to the State Tax Commission in 1964 after termination of the litigation.45 T.C. 615">625 Respondent takes the position that the State tax was being contested and was contingent during the years involved and hence was not properly accruable or deductible until the litigation was terminated and the tax was paid in 1964. Petitioners claim that the partnership was not contesting the tax at any time and that 1966 U.S. Tax Ct. LEXIS 123">146 it was properly accruable in the years for which it was due.The parties agree that the use of the accrual method of keeping books does not preclude the use of the completed contract method of reporting income. See R. G. Bent Co., 26 B.T.A. 1369">26 B.T.A. 1369; A. D. Irwin, 24 T.C. 722">24 T.C. 722. In the Irwin case this Court said:Such [completed contract] method of accounting contemplates proper accrual of all unpaid billings, accounts receivable, and accounts payable in the year the contract is substantially completed * . [Cits. omitted.] The only exception to the rule requiring the accrual of outstanding items in the year of completion is made in the case of outstanding items which are "contingent and uncertain." * * We must therefore determine whether the items in question came within this exception.The same reasoning is applied in determining whether items of expense are deductible within a taxable year under the accrual method of tax accounting and the case law relevant to accrual accounting should be equally pertinent to the completed contract basis of tax accounting, although we must confess it would seem that the basic concept of the accrual method of accounting, which is to match expense items 1966 U.S. Tax Ct. LEXIS 123">147 against the income items they help to produce, is particularly apropos to the completed contract basis for computing income. But see Security Mills Co. v. Commissioner, infra.The basic ground rules for determining whether an expense item is accruable and deductible in a particular year have been established for many years and are not really in dispute. It is only when we attempt to apply those basic rules, and the refinements thereof, to particular factual situations that a divergence of opinion occurs. But despite, or perhaps because of, the many factual situations which have been exposed to the application of these ground rules, we have been unable to find a case which points unerringly to the correct answer in this case.In United States v. Anderson, 269 U.S. 422">269 U.S. 422, the Supreme Court recognized that under the accrual method of accounting in order to properly reflect income, all income and expenses properly accruable in a taxable year must be taken into consideration in computing taxable income for that year. The fact that a tax on the income for that year was not due and payable until the following year did not prevent its accrual in the earlier year where all the events had occurred 1966 U.S. Tax Ct. LEXIS 123">148 in the earlier year which fixed the amount of the tax and determined the liability of the taxpayer to pay it. But in Dixie Pine Co. v. Commissioner, 320 U.S. 516">320 U.S. 516, the Supreme Court also held that where a liability was being contested by the taxpayer and was contingent the "all events" test had not been met in the taxable year to fix the amount and 45 T.C. 615">626 the fact of the taxpayer's liability for items of indebtedness deducted though not paid. Under such circumstances the Court held the deduction for a State tax must await the event of the State court litigation and be claimed in the year in which the taxpayer's liability for the tax was finally adjudicated.In Security Mills Co. v. Commissioner, 321 U.S. 281">321 U.S. 281, the Court held that the legal accounting principle that deductions shall be taken for the taxable year in which "paid or accrued" does not permit taking a deduction for a contingent liability prior to the date it actually accrues; and that a taxpayer may not accrue an expense the amount of which is unsettled or the liability for which is contingent, and that that principle is fully applicable to a tax the liability for which the taxpayer denies and the payment whereof he is contesting. 1966 U.S. Tax Ct. LEXIS 123">149 The Court held that the exception to the general rule contained in that clause of section 43 of the Revenue Act of 1934 which read "unless in order to clearly reflect the income the deductions or credits should be taken as of a different period" did not permit substitution of a hybrid method of accounting for the annual system of accounting long used in the taxing statutes.One of the refinements to the basic rules established by the above cases and adopted by the Commissioner's regulations, see sec. 1.461-1 (a)(2), Income Tax Regs., is the question of when the taxpayer is "contesting" the expense item, such as a tax; and much litigation has involved this issue with some disagreements among the courts. The Court of Claims has rather consistently adhered to the principle that for a contest to exist which would prevent the deduction of an item otherwise accruable, the taxpayer himself must participate in the litigation, see Pittsburgh Hotels Co. v. United States, 63 Ct. Cl. 475">63 Ct. Cl. 475 (1927), or must at least have evidenced his disagreement over his liability for the tax or the amount thereof by some objective act, such as lodging a formal protest with the taxing authorities or instituting 1966 U.S. Tax Ct. LEXIS 123">150 suit in a court of law, and that the concept of "contest" will not be extended to depend on the taxpayer's subjective motive when the return was filed. See Dravo Corporation v. United States, 348 F.2d 542 (Ct. Cl. 1965).This Court distinguished the Pittsburgh Hotels Co. case in Lepman Bros. Co., 45 B.T.A. 793">45 B.T.A. 793 (1941), on the grounds that in the Pittsburgh case the taxpayers had never protested the tax or been a party to the litigation, whereas in Lepman the taxpayers had joined in the litigation originally but had failed to appeal because the trial court had ordered that the ultimate liability of all the taxpayers would be determined by the outcome of an appeal by any of them. However, this Court has gone further to recognize that a "contest" exists, so as to prevent the accrual of taxes, not only where the taxpayer contests the 45 T.C. 615">627 amount of the tax liability, although not the fact thereof, in the courts, see Lehigh Valley Railroad Co., 12 T.C. 977">12 T.C. 977 (1949), but also where the taxpayer does not accrue the liability on its books and denies liability therefor by filing returns under protest, see Great Island Holding Corporation, 5 T.C. 150">5 T.C. 150 (1945), or knowingly omits income from or claims 1966 U.S. Tax Ct. LEXIS 123">151 a deduction on his State tax return which reduces the amount of that tax, see Gunderson Bros. Engineering Corp., 16 T.C. 118">16 T.C. 118 (1951), even though he later agrees to the additional tax and pays it without protest, see Agency of Canadian Car & Foundry Co., 39 T.C. 15">39 T.C. 15 (1962). But cf. H. E. Harman Coal Corporation, 16 T.C. 787">16 T.C. 787 (1951), modified on other grounds 200 F.2d 415; Gulf States Utilities Co., 16 T.C. 1381">16 T.C. 1381 (1951); Denise Coal Co., 29 T.C. 528">29 T.C. 528 (1957); Colt's Manufacturing Co., 35 T.C. 78">35 T.C. 78 (1960).In Southwest Exploration Company v. Riddell, 232 F. Supp. 13">232 F. Supp. 13 (1964), the U.S. District Court for the Southern District of California reviews the above and other cases and concludes, among other things, that by merely submitting a return showing that a certain tax is due the taxpayer asserts that no more than that is due, and if the assertion is made knowingly and in good faith, there is a "contest" as to any amount over that which is shown on his return. "Thus, until the taxpayer accedes to the assessment of a greater amount, he is contesting that amount, and cannot accrue it," citing 39 T.C. 15">Agency of Canadian Car & Foundry Co., supra, and 16 T.C. 118">Gunderson Bros. Engineering Corp., supra. "In short, any 1966 U.S. Tax Ct. LEXIS 123">152 time there is a good faith dispute as to the law or as to proper evaluation of the facts which determine the taxpayer's tax liability there is a contest," citing Rev. Rul. 57-105, 1957-1 C.B. 193.Another issue that has arisen under the "contest" concept is the effect of payment of the item involved. Compare Chestnut Securities Co. v. United States, 62 F. Supp. 574">62 F. Supp. 574 (Ct. Cl. 1945); Consolidated Edison Co. of New York v. United States, 135 F. Supp. 881">135 F. Supp. 881 (Ct. Cl. 1955), wherein the Court of Claims held that payment of the contested tax accrued it, with United States v. Consolidated Edison Co., 366 U.S. 380">366 U.S. 380 (1961), wherein the Supreme Court held that payment of the tax does not necessarily accrue it, and when the exact nature of the payment is not immediately ascertainable because it depends on some future event, such as the outcome of litigation, its treatment for income tax purposes must await that event. Congress has, however, settled this difference of opinion by providing in section 223(a)(1) of the Revenue Act of 1964 ( sec. 461(f), I.R.C. 1954) that a taxpayer may deduct in the year of payment an amount transferred to provide for payment of an asserted liability which he is contesting. 1966 U.S. Tax Ct. LEXIS 123">153 This provision, although retroactive, is of no benefit to petitioners here however, because the partnership did not pay the asserted tax in the years here involved. See sec. 1.461-2(c), Income Tax Regs.45 T.C. 615">628 Resort to the above cases to answer the problem before us gives little satisfaction because not only is there a disparity in the philosophies adopted by the courts but also none of those cases involved all of the pertinent factors we have here. The partnership here did not actually join in the litigation contesting the State tax nor did it file a formal protest with the State tax commissioner denying liability for the tax. On the other hand, it requested and was granted permission to withhold payment of the tax until the outcome of the litigation. It accrued the liability for the tax on its books and deducted the amount thereof on its Federal income tax returns (although in each instance it overtly indicated that the tax was in dispute, by someone at least), but at the same time deducted the amounts thereof on its State retail sales tax returns, thereby reflecting that it considered there was no tax due. Petitioners claim that the partnership would have paid the tax at any time 1966 U.S. Tax Ct. LEXIS 123">154 the taxing authorities demanded it; but the fact remains that the partnership did not pay the tax nor provide for its payment during the years here involved in such a manner as to concede that it owed the tax.Whether the partnership's actions brought the situation within the "contest" concept so as to deny accrual would be difficult to answer, but we do not think that question need be answered because we believe the more basic "all events" test requires denial of the deduction in the years 1960 and 1962. This test requires that to be deductible in a taxable year all the events must have occurred within that year which determines the fact of the taxpayer's liability for the tax. We do not believe this is limited to an inquiry into whether the contracts had been substantially completed, but is also dependent upon the legal question of whether the income from the contracts is subject to the tax. Absent the partnership's concession that the tax was applicable to its income from the Capehart contracts, this legal question could not be answered until the termination of the litigation which was instituted for the very purpose of determining whether the tax was applicable, not only to the 1966 U.S. Tax Ct. LEXIS 123">155 income of the litigating contractors but to the income of all the Capehart contractors, including the partnership. We think there was a good-faith dispute between the State taxing authorities and all the Capehart contractors as to whether a tax was due on the proceeds of these contracts. It would be closing our eyes to realities to believe that the partnership would have conceded that it was liable for the tax until the litigation was terminated. Unless the partnership was disputing its liability for the tax, it could have at any time paid the tax and waived any right to recover the same, regardless of the outcome of the litigation, and we have little doubt the State taxing authorities would have accepted such payment. We can only 45 T.C. 615">629 believe that it was because petitioners were not willing to concede liability for the tax that they were willing to file requests for abeyance of the tax and post personal liability bonds to secure payment of the tax in the event the contractors were unsuccessful in their litigation. Perhaps petitioners were willing to throw in the towel and pay the tax in 1963 after the Supreme Court of Washington had held the tax was due, but neither did they do so 1966 U.S. Tax Ct. LEXIS 123">156 nor would payment at that time have accrued the tax in the years 1960 and 1962, which are before us.So whether we consider the partnership a de facto contestant or a noncontestant, we cannot agree that all events had occurred within the taxable years here involved which would permit the partnership to properly accrue and deduct the State retail sales tax within those years.We rather reluctantly hold for respondent on this issue.Issue 2. Amortization of Covenants Not to CompeteFINDINGS OF FACTPetitioners during the taxable years in question owned a 50-percent stock interest in General Mortgage Agency, Inc., of Longview, Wash. (hereinafter referred to as Mortgage). The principal business activity of Mortgage is that of an insurance agency. The remaining 50 percent of the Mortgage stock during the years in question was owned by Robert V. Holmes, who first became associated with petitioners in the insurance business on July 1, 1958. Prior to association with Holmes, petitioners had been in the insurance business together since 1946. Petitioner E. W. Lutz is a licensed insurance broker with approximately 50 years' experience.The shareholders of Mortgage filed an election to be taxed 1966 U.S. Tax Ct. LEXIS 123">157 under subchapter S of the Internal Revenue Code of 1954 and Mortgage filed its U.S. Small Business Corporation Return of Income (Form 1120-S) on a fiscal year basis for the years ended January 31, 1960, 1961, and 1962 with the district director of internal revenue, Tacoma, Wash.During these periods Mortgage claimed deductions for amortization of the costs of covenants not to compete acquired in connection with the acquisition of four insurance agencies, which deductions have been disallowed by respondent upon a determination that the value of the covenants not to compete was nonseverable from the acquisition of other intangible assets.With respect to the four contracts which contained the covenants not to compete, hereinafter referred to as the Brownlee, Bevington, 45 T.C. 615">630 Bingham, and McFadgen contracts, Mortgage made the following allocation of the purchase price:AllocationContractCostCovenantPropertyIntangiblesBevington$ 2,627.44$ 2,127.44None11966 U.S. Tax Ct. LEXIS 123">158 $ 500Bingham8,913.338,913.33NoneNoneMcFadgen21,300.0021,000.00$ 300NoneBrownlee10,000.006,500.003,500None Insurance agencies located in the region served by petitioners were small in size and normally were operated by one man as an adjunct to a real estate business. Business was basically founded on personal services and accounts were acquired through the friendship and associations of the agent. However, prior to and during the years in question, changes occurred in the insurance business which made it difficult for the small agent to compete with large companies. Some of the larger companies instituted the practice of underwriting policies directly; and in addition policies were often more specialized and demanded a higher degree of knowledge and skill on the part of the agent. Mortgage recognized that if it was to stay in the insurance business, it needed a more experienced man to operate the insurance department, and also the volume of the insurance business would have to be increased. Holmes, an experienced insurance man with an agency in Castle Rock, Wash., agreed to join with petitioners and he exchanged his interest in the Castle Rock agency for a 50-percent interest in Mortgage. The Castle 1966 U.S. Tax Ct. LEXIS 123">159 Rock agency contributed by Holmes was comprised of the Brownlee agency and the Petersen agency, which agencies had previously been acquired by Holmes. Subsequently, Mortgage acquired seven other small agencies in the surrounding areas. 5The board of directors of Mortgage, consisting of E. W. Lutz, Philip B. Lutz, and Holmes, decided Mortgage would expand on a selective basis and would purchase the business or accounts of competing agents. The board also decided that Mortgage would pay an agent only for purposes of eliminating him from competition and would pay nothing for goodwill, because it was felt there was not sufficient goodwill connected with the operation of an agency to justify large expenditures for this purpose. It was decided that it was essential to secure a covenant not to compete from each seller, the cost of which could be amortized over the life of the covenant not to 45 T.C. 615">631 compete for tax purposes. Mortgage carefully considered the tax 1966 U.S. Tax Ct. LEXIS 123">160 aspects involved in acquiring agencies, discussed them with their tax advisers, and negotiated for the businesses with these considerations in mind. The board, acting upon advice of legal counsel, insisted that a liquidated damages provision be included in the contracts so that the covenants not to compete could be enforced if necessary. There was no established policy used in determining the purchase price for the various agencies acquired and the amount offered varied according to the type and volume of business. However, an upper limit of 1 1/2 times the total annual commissions was usually adhered to, and Mortgage would not pay more than that regardless of how attractive the business may have been. In most instances the purchase price was paid in cash and in some cases payments were made in installments, in which latter event payments were contingent upon the seller honoring his covenant not to compete.Mortgage did not acquire or use the name of the agency purchased nor was any attempt made to use the previous location occupied by the agency. The business acquired was immediately transferred to the existing office of Mortgage and business was continued under Mortgage's name. 1966 U.S. Tax Ct. LEXIS 123">161 Letters were sent by the seller to his customers thanking them for their business and notifying them of the sale. In most cases the sellers continued to conduct their real estate business at the same location and under the same name they had previously used.The four contracts question in all provided a specific allocation of the purchase price to the covenant not to compete. The covenants, although differing in form, were substantially the same in all four contracts. The covenants provided generally that the seller agrees to refrain from engaging in any insurance business of any type within the surrounding area for a period of 5 years. Two of the contracts specifically stated that the purchaser desired to eliminate competition and was willing to pay a reasonable sum to the seller for an agreement not to compete; and three of the contracts also provided for liquidated damages in the event the covenant not to compete was breached by the seller.Holmes had acquired the Brownlee insurance agency on August 17, 1957, for $ 10,000 by a written agreement of sale which stated that the value of various items of office equipment was $ 3,500, and contained a covenant not to compete which was 1966 U.S. Tax Ct. LEXIS 123">162 valued at $ 6,500. Mortgage claimed a basis for amortization of the covenant not to compete in the amount of $ 4,550.03 on its return for the taxable year ended January 31, 1960.The Bevington contract specifically allocated $ 500 of the $ 2,627.44 purchase price to the seller's expiration lists and records at the insistence of the seller, the balance of the purchase price being specifically 45 T.C. 615">632 stated to be consideration for the elimination of the seller from competition for 5 years.Robert W. Bingham operated a real estate loan and insurance business in Vancouver, Wash., as a sole proprietorship. His business reached a point where he was either going to have to hire someone to help him or dispose of one of the businesses. He decided to sell the insurance business and got in contact with Holmes, who arranged for the purchase of the business by Mortgage. The agreement of sale recited that the seller desired to dispose of his insurance business and retire from the operation thereof, and that the purchaser desired to eliminate competition and was willing to take over seller's insurance business and pay a reasonable sum to seller for a covenant not to compete for 5 years. The entire purchase 1966 U.S. Tax Ct. LEXIS 123">163 price of $ 8,913.33 was specifically allocated to the covenant not to compete. Although he was aware of the tax implications of a covenant not to compete, Bingham did not consider that the covenant in the contract meant anything and he reported his gain on the sale as capital gain on his tax return.Lyle H. McFadgen had been associated with Bruce E. Rodman in the real estate and insurance business in Longview, Wash., under the corporate name "Longview Agency, Inc." McFadgen operated the insurance business and Rodman the real estate business. In February 1960 McFadgen suffered a stroke which left him partially paralyzed and he began thinking of selling the insurance business. An agreement was reached for sale of the insurance business to Mortgage. As a part of this transaction McFadgen transferred his interest in the real estate business to Rodman and the insurance business was transferred to McFadgen in partial liquidation of the corporation. In this transaction Rodman gave McFadgen a written covenant not to compete in the insurance business, although no consideration was assigned to it. This covenant was transferable. In the agreement for sale of the insurance business by McFadgen 1966 U.S. Tax Ct. LEXIS 123">164 to Mortgage, Rodman's covenant not to compete was assigned to Mortgage and McFadgen also gave a covenant not to compete for 5 years. Of the $ 21,300 purchase price, $ 300 was specifically allocated to certain furniture and equipment, and $ 21,000 was given as consideration for the covenant not to compete. Mortgage also agreed to employ McFadgen for 36 months at a salary of $ 500 per month, subject to his ability to serve Mortgage with approximately the same degree of efficiency he had served Longview Agency, Inc. Liquidated damages of $ 10,000 were provided for a breach of the covenant not to compete. McFadgen was highly respected in the community and when he moved over to Mortgage's offices his name and the name "Longview Insurance Agency" were placed on the window of the corporation's offices. Although McFadgen was aware of the covenant clause he attached little significance to it in view of his employment contract.45 T.C. 615">633 There was no indication of excessive or abnormal profits being made by any of the agencies at the times they were acquired by Mortgage. As a whole the acquisition of these agencies has not proved to be a good investment for Mortgage. Mortgage was unable to hold a 1966 U.S. Tax Ct. LEXIS 123">165 good many of the accounts previously held by the agencies acquired. Holmes withdrew from Mortgage in 1962 and petitioners insisted that he take back and dispose of the Castle Rock business.ULTIMATE FINDINGThe amounts here involved were payments for covenants not to compete.OPINIONThe second issue is whether Mortgage could properly amortize a portion of the purchase price of certain insurance agencies acquired, where the sales contracts contained covenants not to compete and the contracts specifically allocated the purchase price among the covenants and other property, primarily to the covenants.Petitioners are the shareholders of Mortgage, which corporation elected in the taxable years in question to be taxed as a subchapter S corporation.Petitioners argue that each of the four contracts specifically allocate to the covenant the portion of the purchase price for which amortization is sought; that three of the contracts contained provisions for liquidated damages in the event the seller breached the covenant; and that Mortgage was primarily interested in eliminating the sellers from competition, rather than acquiring intangibles or goodwill.Respondent argues that the assignment of 1966 U.S. Tax Ct. LEXIS 123">166 a large portion of the purchase price to the covenant was arbitrary, being motivated solely for tax purposes; that Mortgage was primarily interested in acquiring new business, goodwill, expiration records, and other intangibles; and that the value of the covenant is not severable from the value of the other assets acquired.We agree with petitioners. It is clear that the contracts specifically allocated a fixed dollar amount to the covenant, and as was said in Ullman v. Commissioner, 264 F.2d 305, affirming 29 T.C. 129">29 T.C. 129:when the parties to a transaction such as this one have specifically set out the covenants in the contract and have there given them an assigned value, strong proof must be adduced by them in order to overcome that declaration. The tax avoidance desires of the buyer and seller in such a situation are ordinarily antithetical, forcing them, in most cases, to agree upon a treatment which reflects the parties' true intent with reference to the covenants, and the true value of them in money.While neither the Commissioner nor the courts are bound by the form in which the parties clothe the transaction, Carl L. Danielson, 44 T.C. 549">44 T.C. 549, on appeal (C.A. 3, Dec. 21, 1965); Hamlin's Trust v. Commissioner, 45 T.C. 615">634 209 F.2d 761, 1966 U.S. Tax Ct. LEXIS 123">167 affirming 19 T.C. 718">19 T.C. 718, the nub of the question is whether the covenant not to compete was actually dealt with as a separate item in the transaction and, if it was, how much was paid for it. Gazette Telegraph Co., 19 T.C. 692">19 T.C. 692, affd. 209 F.2d 926; Howard Construction, Inc., 43 T.C. 343">43 T.C. 343. We have quite recently considered this issue in Benjamin Levinson, 45 T.C. 380">45 T.C. 380, and much of what we said in the opinion in that case with reference to the legal aspects of the issue is applicable here. We see no point in repeating that discussion here; instead we simply refer to our opinion in that case.Three of the contracts involved, in addition to assigning a specific value to the covenant, also provided for liquidated damages in the event the seller breached the covenant. We believe this is strong evidence supporting the petitioners' contention that both buyer and seller were aware that Mortgage was primarily interested in eliminating the seller from competition. In fact, some of the contracts specifically stated that the purchaser "desires to eliminate competition," and three contracts provided that payment of the agreed-upon value of the covenant shall constitute consideration in full for 1966 U.S. Tax Ct. LEXIS 123">168 the elimination of the seller from competition with the purchaser for a period of 5 years.Furthermore, in most instances the physical assets acquired were minimal, and any value attributed to them appears to be fair and reasonable. Respondent urges that Mortgage was primarily interested in acquiring expiration lists, customer lists, prospect lists, office records, and goodwill, and that these items are not subject to amortization, citing Rev. Rul. 65-180, 1965-2 C.B. 279; George J. Aitken, 35 T.C. 227">35 T.C. 227; and Edward A. Kenney, 37 T.C. 1161">37 T.C. 1161. The difficulty with respondent's argument is that there is little, if any, evidence which indicates any substantial portion of the purchase price could be assigned or allocated to these intangibles or goodwill. In one instance, the Bevington contract, these items were separately valued at $ 500 and petitioners agree that no amortization for this amount is proper.The evidence fairly indicates that Mortgage was not interested in continuing the agency acquired in the same location. In fact, most of the sellers continued in their real estate sales business, and simply ceased the insurance business altogether. No effort was made by Mortgage to use the 1966 U.S. Tax Ct. LEXIS 123">169 office space, location, or name that might have been developed over the years. The sellers did write their customers thanking them for their business and informing them of the sale, but the evidence rather clearly indicates that most of the attributes present in the acquisition of goodwill were absent in the present case.It is true that the agreement with McFadgen provided that he would continue as an employee for Mortgage for 3 years at $ 500 per month, but this portion of the contract was separately stated, and it appears that a covenant not to compete would still be required to protect 45 T.C. 615">635 Mortgage from competition from McFadgen because McFadgen was not obligated to continue as an employee of Mortgage.Respondent also urges that the purchaser was primarily interested in allocating a large portion of the purchase price to the covenant for tax purposes. Petitioners readily acknowledge that they obtained advice from their tax advisers, but urge that this factor should not be determinative of the issue presented. Perhaps Mortgage agreed to pay more for the elimination of competition than would have been the case if the tax advantages were not present, but it might also be true that Mortgage 1966 U.S. Tax Ct. LEXIS 123">170 was also strongly motivated by the desire to eliminate competition. Probably it was motivated by both considerations. But the awareness on the part of the buyer of the tax advantages in a transaction such as this should not, standing alone, determine the outcome. See 45 T.C. 380">Benjamin Levinson, supra;Schulz v. Commissioner, 294 F.2d 52, affirming 34 T.C. 235">34 T.C. 235. There is no indication that Mortgage engaged in overreaching, or that the sellers had been unwittingly maneuvered into a position with a big tax disadvantage. See Hamlin's Trust v. Commissioner, supra;44 T.C. 549">Carl L. Danielson, supra.Where, as here, it is clear that the purchaser and seller agreed in a contract to specific allocations of the purchase price to the covenant, and the contract also contained a liquidated damages provision, we believe the agreement should stand as written unless strong proof is adduced that the allocation was not separately bargained for, or should be ignored for other reasons. See 45 T.C. 380">Benjamin Levinson, supra;Schulz v. Commissioner, supra;44 T.C. 549">Carl L. Danielson, supra. There is no evidence to support such a conclusion here. We decide this issue for petitioners.Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: E. W. Lutz and Helene B. Lutz, docket No. 2719-64, and Philip B. Lutz and Shirley H. Lutz, docket No. 2720-64.↩2. The partnership originally computed the amount of tax as $ 113,943.46.↩3. It seems doubtful that an injunction was ever actually issued against the State.↩4. Petitioners E. W. Lutz, Helene B. Lutz, P. B. Lutz, and Shirley H. Lutz also signed individually as sureties.↩1. The amortization originally claimed on the Bevington contract was erroneously based upon the entire contract consideration but petitioners agree that $ 500 of the consideration is not allocable to the covenant not to compete.5. Respondent originally disallowed deductions for amortization of the cost of the covenants not to compete under all nine agency contracts but has now conceded that the deductions are allowable with respect to the other five contracts.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620853/	Jerry M. Hyde v. Commissioner.Hyde v. CommissionerDocket No. 6129-69 SC.United States Tax CourtT.C. Memo 1970-256; 1970 Tax Ct. Memo LEXIS 104; 29 T.C.M. (CCH) 1136; T.C.M. (RIA) 70256; September 2, 1970, Filed Jerry M. Hyde, pro se, 5010 San Jacinto, Apt. J, Dallas, Tex. W. John Howard, Jr., for the respondent. STERRETTMemorandum Findings of Fact and Opinion STERRETT, Judge: The respondent determined a deficiency in the Federal income taxes of the petitioner for the taxable year 1966 in the amount of $228. The sole issue for determination is whether the petitioner in 1966 furnished more than half of the total support for his two minor sons, Randall and Russell, so as to be allowed a deduction for personal exemptions for his two sons pursuant to section 151 of the Internal Revenue Code of 1954. 1105 Findings of Fact Some of the facts are stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference. Jerry M. Hyde (hereinafter referred to as petitioner) is an unmarried individual. He resided in Dallas, Texas, at the time his petition was filed herein. Petitioner filed an individual Federal income tax return for the calendar year 1966 with the internal revenue service center, Austin, Texas. The petitioner and his former wife, Yvonne Young Hyde (now Glosson and hereinafter referred to as Yvonne), were married on December 21, 1958. While married petitioner and his former wife had two sons: Randall S. Hyde, born on December 7, 1959, and Russell Y. Hyde, born on February 1, 1961. Petitioner and Yvonne separated in June 1963. On September 21, 1965, the Court of Domestic Relations for Smith CountyTexas, granted a divorce from the petitioner. The Court of Domestic Relations awarded custody and control of the two children to Yvonne and ordered petitioner to pay into court $150 per month for child support. The divorce decree also contained a property settlement. From January to April 1966, Yvonne and the two boys lived with Yvonne's mother, 106 Mrs. C. B. Young, at Tyler, Texas. During this time petitioner visited with his children every weekend for a period starting at 5:00 p.m. Friday and ending 6:00 p.m. Sunday. While visiting with the children the petitioner stayed at the home of his parents in Tyler, Texas, and his children stayed there with him. In the latter part of April 1966, Yvonne and the boys moved to Houston, Texas, and remained there for the balance of the year. 1137 While in Houston, Yvonne and the children lived in a one bedroom apartment. After the move to Houston, petitioner visited with the boys for a 2-week period in the summer, on Thanksgiving and on Christmas. On these occasions petitioner traveled to Houston, picked up the boys and brought them to Tyler, Texas, where they stayed with the petitioner at his parents' home. Petitioner also made an unplanned visit to Houston in June when his oldest son, Randall, underwent an emergency appendectomy. Pursuant to the divorce decree, petitioner paid into the Court of Domestic Relations a total amount of $1,700 as child support for his two boys in the calendar year 1966. Petitioner's expenditures for his children were not confined to the required support107 payments. He spent at least $100 on extra clothing, $150 on extra medical expenses, $25 on haircuts, $175 on various small items while visiting with the boys, $182.90 on transporting the children between Houston and Tyler, Texas, $150 on Christmas gifts, and $25 on other miscellaneous expenses. Additionally, the petitioner provided health insurance coverage for his children. During 1966, the petitioner expended in the aggregate at least $2,507.90 on the support of his children. During the 1-year period immediately prior to his separation from his wife petitioner expended approximately $2,460 for the total support of his sons. The children's standard of living did not improve and perhaps even declined subsequent to Yvonne's divorce from petitioner. Petitioner's former wife was employed during 1966 and successively held at least three different jobs. She would not inform petitioner as to the amount of her earnings. However, she was not educated or qualified to earn a high salary or wage. While she and the two children resided with Mrs. Young, Yvonne paid rent to her mother. The boys were provided with lodging and food by Mrs. Young during the early part of 1966. Any amounts spent108 on the children by Mrs. Young were received from Yvonne who had, in turn, received the money from petitioner. Yvonne paid $80 per month rent on the one bedroom apartment in Houston. The apartment was equipped with furniture received by Yvonne in the property settlement made by the divorce decree. Yvonne and the boys shared the apartment with a roommate. Consequently not more than half of the rent can be considered as having been spent on the boys' support. All of the boys' clothing was purchased directly or indirectly by the petitioner. The children rarely wore anything that required cleaning. Yvonne had a washer and a dryer which she acquired in the property settlement. On his Federal income tax return for the taxable year 1966 petitioner claimed a dependency credit for each of his children. Respondent disallowed the claimed credit and in a statutory notice dated September 25, 1969, stated: It is determined that the deduction of $1,200.00 which you claimed on your return as exemptions for your two sons, Randall and Russell, for the taxable year 1966 is not allowed because it has not been established that you furnished more than half of the support of either during the taxable109 year as required by section 152 of the Internal Revenue Code. Petitioner provided more than one-half of the support for his two minor sons during the taxable year 1966. Opinion The sole question presented here is factual. We are to decide whether petitioner provided more than one-half of the support for each of his two children in 1966. 2 It is axiomatic that petitioner has the burden of showing that the amounts expended on support by him constituted more than onehalf the total support of the children. 110 1138 Petitioner appeared pro se and, testifying in his own behalf, was the only witness at the trial. His testimony was candid and truthful. Respondent has not questioned petitioner's credibility. Petitioner has testified that during 1966 he contributed amounts, which aggregate $807.90, as extra support in addition to the $1,700 paid into the Court of Domestic Relations under the terms of the decree by which he and his former wife, Yvonne, were divorced. Respondent does not question these various items of extra support claimed by petitioner in his testimony or that petitioner spent a total of $2,507.90 on child support. The sole contention of the respondent is that petitioner has not proved that the amounts he expended constituted more than one-half the boys' total support. The exact amount of total support for the children is not required to be shown. Theodore Milgroom, 31 T.C. 1256">31 T.C. 1256 (1959); E. R. Cobb, Sr., 28 T.C. 595">28 T.C. 595 (1957). It is merely required of the petitioner that he convince the Court by sufficient and cogent evidence that he supplied more than one-half of the support for the children during the year in issue. Russell W. Boettiger, 31 T.C. 477">31 T.C. 477 (1958).111 The $2,507.90 expended in 1966 compares favorably with the $2,462 petitioner testified he spent on full support of the boys during the 1-year period immediately preceding his separation from Yvonne. Petitioner visited his children each weekend for the first four months of 1966. Subsequent to the boys' move to Houston, petitioner was with them during Thanksgiving, Christmas, a 2-week summer vacation period, and the time of the older boy's illness from appendicitis in June. These visits gave petitioner sufficient opportunity to observe that the children's standard of living had not improved since petitioner and his former wife had last resided together. See, Edward J. Pillis, 47 T.C. 707">47 T.C. 707 (1967), aff'd per curiam 290 F. 2d 659 (C.A. 4, 1968), certiorari denied 393 U.S. 883">393 U.S. 883 (1969). Petitioner's testimony showed that his former wife was not educated or qualified to earn a large wage or salary. Yvonne and the children resided in the home of Yvonne's mother for the first 4 months of 1966. During that time Yvonne paid rent to her mother. The funds for this rent were derived from the support payments made by petitioner. For the remainder of the year112 the children resided with Yvonne in a one bedroom apartment in Houston for which a rental of $80 a month was paid. The apartment was equipped with furniture received by Yvonne in the property settlement and was shared with a fourth person. Although Yvonne did the children's washing and drying on equipment derived from the property settlement, petitioner supplied all of the boys' clothing. Respondent cites the cases of James H. Fitzner, 31 T.C. 1252">31 T.C. 1252 (1959); Bernard C. Rivers, 33 T.C. 935">33 T.C. 935 (1960); Aaron F. Vance, 36 T.C. 547">36 T.C. 547 (1961); Edward J. Pillis, supra; and Robert I. Brown, 48 T.C. 42">48 T.C. 42 (1967), as demonstrating that the petitioner in this case has not shown that he provided more than one-half the support for his children in 1966. In the present case, unlike the cases cited by respondent, petitioner has shown by sufficient evidence the living conditions of his children, the earning capacity and life style of his former wife, and other circumstances so as to convince this Court that he provided more than onehalf the support of his children during taxable year 1966. E. R. Cobb, Sr., supra. In accordance113 with the foregoing, Decision will be entered for the petitioner. Footnotes1. All section references are to the Internal Revenue Code of 1954 unless otherwise stated.↩2. SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS. (a) Allowance of Deductions. - In the case of an individual, the exemptions provided by this section shall be allowed as deductions in computing taxable income. * * (e) Additional Exemption for Dependents. - (1) In General. - An exemption of $600 for each dependent (as defined in section 152) - * * * (B) who is a child of the taxpayer and who (i) has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or (ii) is a student. * * * (3) Child Defined. - For purposes of paragraph (1)(B), the term "child" means an individual who (within the meaning of section 152) is a son, stepson, daughter, or stepdaughter of the taxpayer. SEC. 152. DEPENDENT DEFINED. (a) General Definition. - For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection (c) or (e) as received from the taxpayer): (1) A son or daughter of the taxpayer, or a descendant of either.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4512526/	IN THE SUPERIOR COURT OF THE STATE OF DELAWARE Q. SCACHERI, M.D., BEVERLY A. SANTANA, MSN, CNM and DEDICATED TO WOMEN OB-GYN, P.A., TIFFANY COX and ALPHONSO ) KEMP, as Parents and natural guardians ) of K.K., a minor, ) ) ) Plaintiffs, ) C.A. No. K19C-11-002 NEP ) In and For Kent County V. ) ) ) BAYHEALTH MEDICAL CENTER, ) JURY TRIAL OF TWELVE INC., a Delaware Corporation, ROBERT __ ) DEMANDED ) ) ) ) ) ) Defendants. Submitted: January 29, 2020 Decided: March 3, 2020 ORDER Upon Review of the Affidavits of Merit DEFERRED This matter involves a healthcare negligence suit filed by Plaintiffs Tiffany Cox and Alphonso Kemp, as parents and guardians of K.K., a minor child, against Defendant Robert Scacheri, M.D. (hereinafter "Moving Defendant"), as well as Defendants Beverly Santana, MSN, CNM, Bayhealth Medical Center, Inc., and Dedicated to Women OB-GYN, P.A., (all Defendants hereinafter collectively "Defendants"). Moving Defendant has asked the Court to review the affidavits of merit filed in this case to determine whether they satisfy 18 Del. C. § 6853. In this case, Plaintiffs filed their Complaint on November 1, 2019, alleging that Defendants were medically negligent and breached the applicable standard of care. Specifically, with regard to the allegations against Moving Defendant, Plaintiffs allege, inter alia, that Moving Defendant failed to provide timely and proper medical and obstetric care, failed to provide timely and proper medical interventions, failed to closely monitor, evaluate, and respond to Plaintiff Tiffany Cox’s medical status, including but not limited to K.K.’s fetal heart rate readings, failed to timely perform a cesarean section, and failed to timely and properly recognize K.K.’s fetal distress. As a consequence of Moving Defendant’s alleged negligence, K.K. allegedly suffered severe and permanent hypoxic ischemic brain injury. The Complaint alleges that Moving Defendant specializes in obstetrics and gynecology and is licensed to practice medicine in the state of Delaware. In Delaware, a healthcare negligence lawsuit must be filed with an affidavit of merit as to each defendant, signed by an expert, and accompanied by the expert's 1 current curriculum vitae.. The expert must be licensed to practice medicine as of the affidavit's date and engaged in this practice in the same or similar field as the +18 Del. C. § 6853(a)(1). defendant in the three years immediately preceding the alleged negligence, and Board certified in the same or similar field as the defendant if the defendant is Board certified.” The affidavit must also state that reasonable grounds exist to believe that the defendant was negligent in a way that proximately caused the plaintiff's injury.” The affidavit must be filed under seal and, upon request, may be reviewed in camera to ensure compliance with statutory requirements.* The affidavit's requirements are "purposefully minimal."’ Affidavits that merely track the statutory language are deemed sufficient.® In this matter, three affidavits of merit are under consideration. Only one of these affidavits is applicable to Moving Defendant.’ As requested by Moving Defendant, upon the Court’s in camera review, the Court finds that the curriculum vitae attached to the applicable affidavit appears to be out of date.® * Id. § 6853(c). * Id. * Id. § 6853(d). * Mammarella v. Evantash, 93 A.3d 629, 637 (Del. 2014) (quoting Dishmon v. Fucci, 32 A.3d 338, 342 (Del. 2011)). ° Dishmon, 32 A.3d at 342-43. ” The other two affidavits are inapplicable to Moving Defendant because they are from experts in the fields of Midwifery and Nursing who are not themselves physicians (and therefore cannot be Board certified or licensed to practice medicine in the same or similiar field as Moving Defendant). Therefore, these experts may not offer standard of care opinions regarding Moving Defendant. See Friedel v. Osunkoya, 994 A.2d 746, 751, 764 (Del. Super. 2010) (holding that pharmacologist could not offer standard of care opinion regarding physician because construction of 18 Del. C. §§ 6853-54 requires experts be within similar field of medicine and receive same training). * The curriculum vitae indicates that the expert’s board certifications in obstetrics and gynecology and maternal-fetal medicine are expected to expire on December 31, 2010, although the affidavit itself states that the expert is currently board-certified in obstetrics and gynecology and maternal-fetal medicine. Moreover, the curriculum vitae lists no specific dates of The Court acknowledges that Section 6853 requires a plaintiff to supplement his or her expert affidavit(s) of merit with a current curriculum vitae, and that failure to do so equates to non-compliance with the statute.’ Nevertheless, this Court has discretion in choosing an appropriate sanction for noncompliance and must balance dismissal with the Court’s strong policy favoring the deciding of cases on the merits.'° In another context, the Delaware Supreme Court has observed that “[t]he sanction of dismissal is severe and courts are and have been reluctant to apply it except as a last resort.” The Delaware Supreme Court in Dishmon, supra, held that a failure to enclose a curriculum vitae with the affidavit of merit did not justify dismissal and was a mere procedural deficiency.'* Moreover, as in Dishmon, there are no facts here to suggest that Plaintiffs were personally responsible for their attorney’s failure to include a current curriculum vitae or that Plaintiffs’ attorney acted in bad faith. WHEREFORE, in consideration of the above, Plaintiffs shall be provided an additional twenty-one (21) days from the date of this Order to provide an employment or publication later than 2009. ° Estate of Requa v. Bayhealth Medical Center, Inc., 2019 WL 2366871, at 1 (Del. Super. June 4, 2019). 10 Td. Hoag v. Amex Assurance Co., 953 A.2d 713, 717 (Del. 2008) (sanction of dismissal disfavored for discovery violations except as last resort). Dishmon, 32 A.3d at 344-45. The Supreme Court also noted than an affidavit of merit is not discoverable and thus the defense would not be prejudiced by a late submission. Jd. at 345. 13 Td. affidavit of merit that complies with 18 Del. C. § 6853(c) to avoid dismissal of the complaint. IT ISSO ORDERED. /s/Noel Eason Primos Judge NEP/wjs Via File&ServeXpress oc: Prothonotary Counsel of Record	01-04-2023	03-04-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620856/	Daniel J. LeRoy v. Commissioner.Le Roy v. CommissionerDocket No. 3712-67.United States Tax CourtT.C. Memo 1969-11; 1969 Tax Ct. Memo LEXIS 281; 28 T.C.M. (CCH) 47; T.C.M. (RIA) 69011; January 16, 1969, Filed Daniel J. LeRoy, pro se, 560 Bellevue, Lake Orion, Mich. Juandell D. Glass, for the respondent. WITHEYMemorandum Opinion WITHEY, Judge: Respondent determined a deficiency in petitioner's income tax for 1965 in the amount of $394.97. As a result of a concession by respondent, the only issue remaining for decision is whether petitioner was entitled to a dependency exemption for two of his minor children in 1965. The facts have been stipulated and are found accordingly. Petitioner resided at Lake Orion, Michigan, at the time the petition was filed. 282 For the taxable year 1965, he filed his individual income tax return with the district director of internal revenue at Detroit, Michigan. Petitioner and his former spouse, Shirley LeRoy (hereinafter referred to as Shirley), were divorced on November 13, 1962, pursuant to an order entered in the Circuit Court for Oakland County, Michigan. Pursuant to the divorce decree, Shirley was awarded the legal care, custody, and control of their three minor children, Daniel, Alan, and Keith, until each child reached the age of 18, subject to petitioner's right of visitation. The decree further provided that from November 13, 1962, until each child reached the age of 18, petitioner was to pay Shirley $15 a week for each child, and in the event that petitioner had custody of any of the children for a period of one full week or more, he would not be required to make a payment to Shirley for the week or weeks that he had custody of the child or children. Under the decree, petitioner was also ordered to provide for all necessary medical, hospital, and dental expenses for his three children. As a result of an amendment to the divorce decree on January 28, 1963, petitioner was awarded legal care, 283 custody, and control of Daniel for a 6-month period with the right to petition the court for permanent custody. During the 6-month period, petitioner was not required to pay Shirley any support money for Daniel. Custody was to revert to Shirley if petitioner failed to obtain a permanent order. During the period January 1, 1965 through December 31, 1965, petitioner paid $1,519 to Shirley through the Friend of the Court for Oakland County, Michigan, for the support of two of his children, Alan and Keith. 1Pursuant to sections 151(a) and (e)2 and 152(a)(1) 3 of the Internal Revenue Code of 1954, as well as the decided cases, in order for petitioner to be entitled to a dependency exemption for his sons Alan and Keith for the year 1965, he must prove not only the amount he contributed toward their support, but also that those contributions exceeded one-half of the total support expended on the children. While the record284 discloses that petitioner contributed a total of $1,519 toward the support of his sons Alan and Keith during 1965, there is insufficient evidence from which we can determine whether that contribution exceeded 50 percent of the total cost of their support for that year. Accordingly, we must hold that petitioner has failed to prove his entitlement to a dependency exemption for his sons Alan and Keith in 1965. 285 In order to reflect the concession of respondent as to the third child, Decision will be entered under Rule 50. 49 Footnotes1. Respondent concedes the issue with respect to one dependency exemption for the minor child, Daniel LeRoy, who resided with petitioner during the entire calendar year 1965 and who was wholly supported by petitioner during that year.↩2. SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS. (a) Allowance of Deductions. - In the case of an individual, the exemptions provided by this section shall be allowed as deductions in computing taxable income. * * * (e) Additional Exemption for Dependents. - (1) In General. - An exemption of $600 for each dependent (as defined in section 152) - * * * (B) who is a child of the taxpayer and who (i) has not attained the age of 19 at the close of the calendar year in which the taxable year of the taxpayer begins, or (ii) is a student. ↩3. SEC. 152. DEPENDENT DEFINED. (a) General Definition. - For purposes of this subtitle, the term "dependent" means any of the following individuals over half of whose support, for the calendar year in which the taxable year of the taxpayer begins, was received from the taxpayer (or is treated under subsection (c) as received from the taxpayer): (1) A son or daughter of the taxpayer, or a descendant of either. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620857/	The Equitable Life Assurance Society of the United States, Petitioner, v. Commissioner of Internal Revenue, RespondentEquitable Life Assurance Soc. v. CommissionerDocket No. 31470United States Tax Court19 T.C. 264; 1952 U.S. Tax Ct. LEXIS 42; November 19, 1952, Promulgated 42 Decision will be entered for the petitioner. On the date of a decedent's death, petitioner-insurer held insurance proceeds which were includible in the decedent's gross estate under section 811 (g) of the Internal Revenue Code. The decedent had made provision that the proceeds of the insurance should be paid to the beneficiaries in installments on the happening of certain contingencies. Held, that petitioner-insurer is not a transferee or trustee within the meaning of section 827 (b) of the Internal Revenue Code. Stuart McCarthy, Esq., for the petitioner.Francis J. Butler, Esq., for the respondent. Hill, Judge. Murdock, Turner, Opper, and Bruce, JJ., dissent. HILL 264 The respondent determined that the petitioner was liable for estate tax of the estate of Avis A. Roudabush in the amount of $ 5,240.72 as a transferee and trustee of the property of this estate.Two issues were raised by the pleadings. One of these concerned the running of the statutory period of time within which any part 265 of the deficiency could be assessed against the transferee. 44 Petitioner has made no argument with respect to this issue and accordingly we consider it to have been abandoned. The only issue raised for decision, therefore, concerns the question whether the petitioner is a transferee or trustee under the provisions of section 827 (b) of the Internal Revenue Code.FINDINGS OF FACT.The facts were stipulated and they are so found. Only those necessary for an understanding of the case are presented herein.Petitioner is a mutual life insurance corporation organized under the laws of the State of New York, and has its principal place of business in New York. During the course of its business it insured the life of one Avis A. Roudabush. Avis A. Roudabush died on or about March 13, 1945, and an estate tax return was filed with the collector of internal revenue for the district of Virginia on July 1, 1946, by the administrator of his estate.On January 13, 1947, the respondent issued a statutory notice of deficiency to the decedent's estate in which it was determined there was a deficiency in Federal estate tax in the amount of $ 15,724.76. The estate petitioned this Court for a redetermination of its liability for the deficiency, and on November45 29, 1949, this Court entered a decision that there was a deficiency in estate tax due from the estate of Avis A. Roudabush in the amount of $ 15,724.76, pursuant to a stipulation of the parties in Docket No. 13497. Only $ 50 of such deficiency has been paid. All of the assets of the estate have been distributed and there remains in the estate no assets with which to pay the balance of the deficiency.Respondent determined that the amount of $ 5,240.72 constitutes petitioner's liability as transferee and trustee of the property of the decedent's estate. Notice of liability was mailed to petitioner on or about September 6, 1950.The policies issued by the petitioner on the life of the decedent and the net amount thereof included in his gross estate for Federal estate tax purposes are shown by the following schedule:PolicyPolicy#2324,584#2419,313issued inissued in19181919Face amount$ 2,000.00$ 5,000.00Less certain loans or advances obtained by the decedenton security of the policies988.032,759.25Net amount remaining under policies at the date ofdecedent's death and reported as part of decedent'sgross estate$ 1,011.97$ 2,240.7546 Policy#2419,314issued inTotal1919Face amount$ 5,000.00$ 12,000.00Less certain loans or advances obtained by the decedenton security of the policies2,759.006,506.28Net amount remaining under policies at the date ofdecedent's death and reported as part of decedent'sgross estate$ 2,241.00$ 5,493.72266 There were certain optional settlement provisions contained in the three policies. Decedent had elected to avail himself of these provisions and, accordingly, pursuant to his request, there were attached to and made a part of these policies certain settlement agreements designated certain beneficiaries and setting forth the manner in which, and the persons to whom, the amounts payable under the policies by reason of his death were to be paid by the petitioner.In accordance with the terms and conditions of the option settlement agreements, portions of the proceeds of the insurance policies, aggregating $ 2,493.88, were to be paid by the petitioner to the insured's daughter, Susan Roudabush Sheets, upon her attainment of age 30. She reached the age of 30 on October 30, 1945, and petitioner thereupon paid her the sum of $ 2,493.88, 47 plus interest. Of the remainder of the proceeds of the policies the sum of $ 252.99 is to become payable to the insured's daughter, Nancy Jeanette Roudabush McDaniel, upon her reaching the age of 30 years, apparently November 28, 1955. If Nancy Jeanette Roudabush McDaniel dies prior to the attainment of the age of 30, this sum is to be paid to her surviving children, if any, and if there is none, then to certain other contingent beneficiaries. An additional sum of $ 252.99 is to be paid on the death of Nancy Jeanette Roudabush McDaniel to her surviving children, if any, and a further sum of $ 2,493.86 is to be paid on the death of Susan Roudabush Sheets to her surviving children, if any. If there are no surviving children of either of these two daughters then other named contingent beneficiaries are to receive the sums specified. During the period of deferment of the payment of proceeds of the policies, interest at the rate determined in accordance with the option settlement agreements is payable to Susan Roudabush Sheets and Nancy Jeanette Roudabush McDaniel.None of the proceeds of the policies on the life of the decedent have ever been segregated by the petitioner, but all48 such proceeds have been commingled with its general assets.OPINION.The issue before us, as framed by the parties, is whether under section 827 (b) of the Internal Revenue Code the petitioner-insurer is liable for any part of unpaid estate tax as an alleged "transferee or trustee" of life insurance proceeds includible in decedent's gross estate under section 811 (g) of the Internal Revenue Code.Section 827 reads as follows:SEC. 827. LIEN FOR TAX.(b) Liability of Transferee, Etc. -- If the tax herein imposed is not paid when due, then the spouse, transferee, trustee, surviving tenant, person in possession 267 of the property by reason of the exercise, nonexercise, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate under section 811 (b), (c), (d), (e), (f), or (g), to the extent of the value, at the time of the decedent's death, of such property, shall be personally liable for such tax. Any part of such property sold by such spouse, transferee, trustee, surviving tenant, person in possession of property by reason of the exercise, nonexercise, or release of a power of appointment, 49 or beneficiary, to a bona fide purchaser for an adequate and full consideration in money or money's worth shall be divested of the lien provided in section 827 (a) and a like lien shall then attach to all the property of such spouse, transferee, trustee, surviving tenant, person in possession, or beneficiary, except any part sold to a bona fide purchaser for an adequate and full consideration in money or money's worth.It is obvious, of course, that the above section does not specifically refer to the liability of an insurer holding life insurance proceeds. Nor does the section contain any all-inclusive or general classification into which the petitioner might fall. Instead, it sets out six specific persons who may be liable under the section. Accordingly, petitioner is liable under this section only if it comes within one of these classifications. We can exclude the classifications of spouse, surviving tenant, and person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment. Nor do we perceive any basis upon which the petitioner here could be held to be a beneficiary. The question remains whether the petitioner is, as the50 respondent maintains, a transferee or trustee under this section.We believe that the respondent's position is predicated on an interpretation of the scope of these terms as employed in section 827 (b) which is clearly erroneous. Viewed categorically, the two terms, trustee and transferee, are subject to multiple and varied interpretations, but when such terms are employed in a technical provision of statutory law they take on a more definite and restrictive meaning supplied by the context of the particular section of which they are a part. In a single sentence of section 827 (b) it is provided that there may be liable six classifications of persons who hold property includible in the estate under six specific subsections of section 811 of the Code. We believe that the authors of this provision, desirous that the holders of the property under each of these subsections should be liable, studiously chose a classification applicable to each of such subsections and included them in section 827 (b) in the same order as the related property interests appear in subsections (b) through (g), inclusive, of section 811. This will be more apparent from an examination of each of the classifications. 51 The first one mentioned is "spouse", which corresponds with the first of the subsections, 811 (b), which provides for the inclusion in the gross estate of dower or curtesy interests. The next two classifications, that of transferee and trustee, are applicable both to section 811 (c), which 268 refers to transfers by trust or otherwise, in contemplation of death, etc., and to section 811 (d), which refers to transfers by the decedent by trust or otherwise where enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent, etc. The fourth classification, that of surviving tenant, corresponds and relates to section 811 (e), joint interests. The fifth classification, person in possession of the property by reason of the exercise, nonexercise, or release of a power of appointment, corresponds and relates to section 811 (f), powers of appointment. The final classification, beneficiary, corresponds and relates to section 811 (g), which requires inclusion in the gross estate of proceeds of life insurance.The relationship between each classification to each of the above subsections, (b) through (g), inclusive, of section52 811, is clearly defined. The transferee and trustee referred to in section 827 (b) are the trustee and transferee to whom the decedent during his lifetime made the transfers set out in section 811 (c) and (d), and in order for a person to be held liable under section 827 (b) as a transferee or trustee it must be made to appear that he is the transferee or trustee specifically designated in section 811 (c) and (d). The respondent herein does not argue or suggest that the insurance proceeds are includible in the gross estate by virtue of subsections (c) and (d) of section 811 or that the petitioner herein is a trustee or transferee within the meaning of these two subsections.To proceed with our analysis of the provisions in question it also appears clear to us that the authors of the section intended the last classification, that of beneficiary, to be the person liable for the insurance proceeds includible in the gross estate under section 811 (g). Certainly, if it were intended that insurers, as such, were to be liable for any insurance proceeds which they held, the last classification would have been made sufficiently broad to include any such insurance company.We interpret section53 827 (b) to mean that only beneficiaries may be liable under this section for life insurance proceeds includible in the gross estate. Our interpretation in this respect appears to be fully in accord with the legislative intent of Congress when, by section 411 of the Revenue Act of 1942, the section was amended to read as it now appears. Prior to the amendment, section 827 (b) read as follows:(b) Upon Property of Transferee. -- If (1) except in the case of a bona fide sale for an adequate and full consideration in money or money's worth, the decedent makes a transfer, by trust or otherwise, of any property in contemplation of or intended to take effect in possession or enjoyment at or after his death, or makes a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (A) the possession or enjoyment 269 of, or the right to the income from, the property, or (B) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom, or (2) if insurance passes54 under a contract executed by the decedent in favor of a specific beneficiary, and if in either case the tax in respect thereto is not paid when due, then the transferee, trustee, or beneficiary shall be personally liable for such tax, and such property, to the extent of the decedent's interest therein at the time of such transfer, or to the extent of such beneficiary's interest under such contract of insurance, shall be subject to a like lien equal to the amount of such tax. Any part of such property sold by such transferee or trustee to a bona fide purchaser for an adequate and full consideration in money or money's worth shall be divested of the lien and a like lien shall then attach to all the property of such transferee or trustee, except any part sold to a bona fide purchaser for an adequate and full consideration in money or money's worth.In both the Senate Finance Committee and House Ways and Means Committee Reports, attention was called to the fact that section 827 (b), prior to amendment, referred only to transfers in contemplation of death or intended to take effect in possession or enjoyment at or after death, and life insurance in favor of a specific beneficiary. The55 reports went on to state that all the assets referred to in section 811 are to be treated equally for purposes of inclusion in the gross estate and by virtue of the amendment the holders or recipients of all such assets were accordingly placed in the same plane of personal liability for the tax. 156 Our construction of section 827 (b) is also in accordance with the construction placed on the predecessor section by the Court of Appeals for the District of Columbia in John Hancock Mutual Life Insurance Co. v. Helvering, 128 F.2d 745">128 F. 2d 745, reversing 42 B. T. A. 809. The predecessor section there involved was section 315 of the Revenue Act of 1926. Referring to that provision, the judge stated:* * * The most significant language for this case is that of subsection 315 (b). 270 "If(1) except in the case of a bona fide sale for an adequate * * consideration * * ,the decedent makes a transfer, by trust, or otherwise, of any property * * intended to take effect in possession or enjoyment at or after his death, * * * or(2) if insurance passes under a contract executed by the decedent in favor of a specific beneficiary, andif in either case the tax in respect thereto is not paid when due, then the transferee, trustee or beneficiary shall be personally liable for such tax, and such property,to the extent of the decedent's interest therein at the time of such transfer, or57 to the extent of such beneficiary's interest under such contract of insurance, shall be subject to a like lien equal to the amount of such tax. * " (Italics supplied)The imposition of liability appears to follow two lines. First is the case where decedent makes a transfer by trust or otherwise. Second is the case where insurance passes under a contract to a specific beneficiary. These two cases are set-off by "(1)" and "(2)". If the tax has not been paid, it is provided that in either case the transferee, or beneficiary is personally liable. The statute proceeds to impose a lien on the estate property to the extent of decedent's interest at the time of transfer or to the extent of the beneficiary's interest under the insurance contract. It is clear that an insurance beneficiary is liable. The structure of the subsection is very persuasive that, where insurance is involved, he is the only one who is personally liable. * * It is to be noted that the opinion in the John Hancock Mutual Life Insurance Co. case, supra, was decided May 11, 1942, and the Revenue Act of 1942 was enacted October 21, 1942. 58 It certainly appears likely to us, therefore, that when Congress considered the amendment in question it was aware of the existence and the importance of the decision in John Hancock Mutual Life Insurance Co. case, yet there is no indication that Congress intended to broaden the scope of this section to cover insurance companies.For the foregoing reasons we conclude and hold that the petitioner is not liable as a transferee or trustee within the meaning of section 827 (b) of the Code and since our holding here appears to be in conflict with our holding in the case of John Hancock Mutual Life Insurance Co., 42 B. T. A. 809, we will not hereafter follow the latter.While section 900 (e) of the Code provides that the term "transferee" as used in that section includes heir, legatee, devisee, distributee and any person who is personally liable under section 827 (b), 2 the respondent makes no argument that the petitioner is a transferee under the provision of section 900 of the Code other than by 271 virtue of its being a transferee within the meaning of section 827 (b) of the Code. Accordingly, we need give no further consideration to section 59 900 other than to note that there is a distinction between the term "transferee" as used in the two sections of the Code as evidenced by our foregoing discussion of the issue presented herein and the distinction should be kept in mind lest confusion results.Decision will be entered for the petitioner. Footnotes1. The reports of the Senate Finance Committee and the House Ways and Means Committee are identical with respect to the proposed amendment to section 827 (b) of the Code. The following comment appears at page 168 of the House Report and page 241 of the Senate Report: SECTION 411. LIABILITY OF CERTAIN TRANSFEREESThis section, which is identical with section 411 of the House bill, clarifies and amends provisions of the Internal Revenue Code relating to the estate tax lien and transferee liability. Section 827 (a) of the Code imposes a lien upon the gross estate of the decedent. The following subsection provides for a like lien upon assets received by certain persons. The latter provision is unnecessary and it is therefore eliminated. Subsection (b), as amended, contains a cross reference to the lien imposed by subsection (a), which continues to be applicable.Section 827 (b), as it now appears in the Code, in imposing personal liability for the tax refers only to transfers in contemplation of death or intended to take effect in possession or enjoyment at or after death, and life insurance in favor of a specific beneficiary. However, all the assets referred to in section 811 are treated equally for purposes of inclusion in the gross estate and the holders or recipients of all such assets are accordingly placed on the same plane of personal liability for the tax.This section also makes more specific the definition of "transferee" in section 900 (e) of the Internal Revenue Code↩, which, however, is not all-inclusive.2. Note that definition of "transferee" is not limited to the persons named. See footnote 1, supra↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620858/	Williams Bar Dredging Company, a California corporation, v. Commissioner.Williams Bar Dredging Co. v. CommissionerDocket Nos. 3284, 4074.United States Tax Court1945 Tax Ct. Memo LEXIS 124; 4 T.C.M. (CCH) 737; T.C.M. (RIA) 45244; June 30, 1945124 Petitioner entered into two lease agreements for placer mining on the Yuba River, California. In both, the lessors reserved reversionary and other rights of ownership. Royalties paid to lessors were based on a percentage of net profits in one lease and on a percentage of mint or smelter returns in the other. Held, royalties so paid were includible in the lessors' gross income and hence, excludable from petitioner's gross income. Philip S. Mathews, Esq., 111 Sutter St., San Francisco, Calif., for the petitioner. T. M. Mather, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion The respondent determined deficiencies in the petitioner's tax as follows TaxYearDeficiencyIncome1939$ 2,021.29Income19404,110.07Income194119,938.15Declared value excess profits19413,153.34The sole issue is whether certain amounts paid by the petitioner, pursuant to gold mining agreements, were capital expenditures or were excludibel from the petitioner's income. If not excludible, were they deductible as rents or royalties or as ordinary and necessary business expenses? Findings of Fact The facts were stipulated. 125 The portions thereof material to the issue are as follows: The petitioner is a California corporation with its principal office at San Francisco. It filed its income tax returns for the taxable years with the collector of internal revenue for the first district of California. In the latter part of 1935 and early in 1936 certain individuals entered into a joint venture called the "Mammoth Gold Venture" vor the purpose of obtaining placer mining leases upon, and prospecting for gold in, certain gravel deposits in the bed of the Yuba River in Yuba County, California. During this period three leases were obtained covering a continuous stretch of gravel deposits in the bed of the Yuba River for a distance of upwards of two miles along its course. The first lease was dated January 14, 1936, and was executed by A. Gunning, et al., as lessors, to Elliott E. Check, as lessee, leasing about 247 acres of land for 15 years, or until sooner terminated, pursuant to the conditions set forth in the lease. The lessee was granted the exclusive right of possession for the purpose of mining, exploiting and removing therefrom placer gold or other minerals, with the right to construct buildings and126 other necessary equipment. A rental of $100 per month was provided until mining operations should begin. The lessee agreed to pay the lessors 10 per cent of all moneys paid by the purchasers of the gold "as and for royalty payments under this lease." The second lease was dated August 5, 1935, and was executed by Mammoth Gold Dredging Company to Milton and Van Wyck, leasing about 160 acres of land for 15 years for mining purposes. A rental of $200 per month was imposed until the mining operations should begin. The purchaser of the gold and other minerals mind from the property was to pay the proceeds thereof to a bank, which, in turn, was instructed to pay 10 per cent thereof to the lessors and 90 per cent to the lessees. Such payments were termed royalties. The third lease was dated January 24, 1936, and was executed by Hazel and Edwin Forbes to Milton, et al., leasing certain fractional lots in the bed of the Yuba River, beginning August 1, 1936, and continuing until all gold and other metals profitably recoverable should have been mined. Certain time limits were set for starting operations and a monthly rental of $250 was payable until such operations should be begun. Thereafter127 the lessees agreed to pay the lessors 10 per cent of mint or smelter returns as "royalty rental payments" with appropriate adjustments for the rental payments of $250 paid during the period prior to active operation. In all three leases detailed provisions were made for re-entry and forfeiture upon default. The portion of the bed of the Yuba River covered by these leases is hereinafter sometimes designated as the "Mammoth property" and the leases themselves are sometimes designated as the "underlying leases." The lessees named in the underlying leases were nominees of and held the leases for the benefit of Mammoth Gold Venture. As the leases were obtained the Mammoth Gold Venture prospected the property for placer mining purposes. This was accomplished by drilling holes or shafts at appropriate intervals to the depth of the gravel deposit so that the deposit might be thoroughly tested for the presence of gold or other precious minerals in the various strata therein. By drilling such holes at given points on these deposits and keeping records of the findings it was estimated upon the completion of the exploratory work that approximately $1,500,000 gold was recoverable from the128 area tested, and it was further estimated that this gold could be recovered by dredging operations through the expenditure of $600,000. In June, 1936, with the exploratory work completed, titles checked, and the venture ready for operations, the Mammoth Venture had expended $18,550. A small part was paid for attorneys' fees, rental payments on the leases and miscellaneous expenses. The remainder was expended in the actual drilling and testing operations. At that time it was estimated that $200,000 in capital would be required to build a dredge and to supply the necessary working capital for the actual placer mining operation. The members of Mammoth Gold Venture did not have sufficient capital to finance the dredging operations and it was necessary to interest outside capital for this purpose. Thereupon, the petitioner, Williams Bar Dredging Company, was incorporated under the laws of the State of California on June 18, 1936, and it sold 200,000 shares of its capital stock of the par value of $1.00 per share without any discount or selling commission. Eleven members of the Mammoth Gold Venture subscribed for the petitioner's shares in the amount of $93,500. Twenty-eight other persons, 129 who were not members of the Mammoth Venture, subscribed for the petitioner's shares in the amount of $106,500. The persons constituting the so-called Mamoth Gold Venture entered into an agreement with the petitioner dated July 6, 1936. The agreement is entitled "Agreement of Assignment." The petitioner is designated as the "lessee" and the individuals as the "lessors." The agreement recited that the lessors had acquired certain leases of land on the Yuba River and described the three leases hereinbefore mentioned. The lessors then sold, assigned, transferred, set over and granted to the petitioner as lessee, all of their right, title and interest in the leases and all their rights, powers and privileges thereunder, subject to certain specified conditions and covenants. Article I set forth the covenants of the lessors. They agreed to execute proper instruments of transfer; to pay all royalties to date; to procure extensions of the primary leases if possible; to endeavor to secure a lease or a claim which conflicted with the Gunning lease, and to secure leases on adjacent property and to transfer them to the lessee, such property to become subject to the terms of their present lease. 130 Article II specified the petitioner's covenants. It promised to sell sufficient capital stock to finance the dredging operations. Paragraph 5 provides as follows: "The net profits of the Lessee before depreciation, depletion and Federal income taxes, as said net profits are hereinafter defined, from the operations of the Lessee upon the lands subject to this agreement shall be paid and applied in manner following to wit: "(a) Nothing shall become due to the Lessors hereunder until such net profits before depreciation, depletion, and Federal income taxes, shall equal the aggregate of the par value of all Lessee's shares of stock which shall be issued and outstanding upon the effective date of this agreement (but not exceeding in the aggregate the sum of $200,000), nor until there shall have been paid to the stockholders of Lessee all such net profits, less any Federal income taxes which may have become due prior to payment of all such net profits. "(b) Thereafter the Lessee shall pay as royalty to the Lessors 45% of all said net profits before depreciation, depletion and Federal income taxes, provided, however, that the Lessee shall simultaneously pay to its stockholders as131 dividends or shall disburse to its stockholders from the amount of depreciation and percentage depletion thereafter accruing, an amount before Federal income tax not less than the royalty so paid to the Lessors. The first $18,550 of such royalty shall be paid to those of the Lessors whose names, addresses and respective interests are set forth in Exhibit D attached hereto and made part hereof. The remainder of such royalty shall be paid to those of the Lessors whose names, addresses, and respective interests are set forth in Exhibit E attached hereto and made part hereof. In the event the Lessee shall sustain a net loss from operations, before depreciation, depletion, and Federal income taxes, for any calendar month during the term of this agreement, such loss shall be carried forward to the month succeeding and the Lessors' royalty shall throughout the term hereof be determined as hereinabove provided upon the net profits of the Lessee before depreciation, depletion, and Federal income taxes, for each calendar month after the Lessee shall first have made good any such net loss for the month or months preceding. "The term 'net profits before drepreciation, depletion, and Federal132 income taxes' shall mean the gross receipts from the operations, plus return of working capital at the end of the operations; plus any salvage value for the dredge and equipment, less operating costs and royalties to be paid to original lessors named in the leases hereinabove described." The petitioner also agreed to make all leases it might acquire, on adjacent placer ground, subject to the agreement. The lessee was prohibited from assigning the leases of any interest threin or subletting the property, without the consent of the lessors. The agreement further provided that if the petitioner should default in the performance of the terms of the lease or in the payment of royalties, the lessors might terminate the agreement and repossess the property. Specific notices relating to default were required to be given. The petitioner might abandon one or more of the leases if no profitable recovery could be obtained therefrom. The petitioner entered into the possession of the premises demised in the underlying leases, constructed a dredge thereon of the character and within the time stipulated in said underlying leases and in the agreement with its lessors. The petitioner dredged the133 leased property diligently, as required, and paid to the lessors named in the underlying leases the rents and royalties reserved to them. The petitioner paid to Mammoth Gold Venture, as provided in the agreement of July 6, 1936, $17,238.92 in 1939; $46,657.12 in 1940 and $38,171.25 in 1941. The petitioner's sole rights in the Mammoth property were those granted and defined in the agreement of July 6, 1936, and the petitioner never acquired any title or equity to the property other than as provided therein. After completing the mining of the Mammoth property, as hereinabove described, the petitioner extended its operations on the Yuba River to property owned by Yuba Consolidated Gold Fields, a corporation, hereinafter called Yuba, and contiguous dowristream to the Mammouth property. The petitioner and Yuba entered into an agreement dated September 1, 1941. The document was headed "MINING LEASE" and designated Yuba as the "lessor" and the petitioner as the "lessee." The lease recited that the petitioner was engaged in placer mining operations along the Yuba River and that the Yuba land being leased was situated immediately downstream therefrom. The lease stated that the lessor "does134 hereby lease, demise and let unto the Lessee, and the Lessee does hereby hire and take of and from the Lessor * * all of the Lessor's right, title and interest in and to the minerals and the right to mine the same in the * * * property in and along the Yuba River * * ." The lessor leased only its right, title and interest in and to the property "without any covenant or warranty." The petitioner was granted the exclusive right of possession of the property for the purpose of prospecting for, mining, exploiting and removing therefrom the placer gold or other minerals therein. The term of the lease was to continue as long as placer mining operations could be carried on profitably. The lessee might abandon its operations and terminate the lease at any time by delivering to the lessor a quitclaim deed and by paying $10. In any event, the lease was to terminate on December 31, 1947. The lease further provided: "As royalty the Lessee shall pay to the Lessor sums to be determined as follows: (1) Lessee shall keep full, true and accurate records of the yardage worked by it in each period between clean-ups, such yardage to be computed in accordance with a method mutually agreed upon. 135 "(2) From the aggregate net mint and/or smelter returns of all values recovered by Lessee during each calendar month from the demised premises, there shall be deducted and retained by the Lessee a sum equal to five cents for each cubic yard of material worked by Lessee in such month. One-half of any balance remaining shall be paid to the Lessor on or before the 15th of the succeeding calendar month, and the other one-half shall be retained by the Lessee. * * * * "(4) The Lessee further shall pay prior to delinquency the taxes levied upon the demised premises by the County of Yuba and charge the Lessor with one-half of the amount so paid. Taxes for the fiscal year 1941-1942 shall be prorated from the date Lessee shall commence operations hereunder and for the fiscal year in which this lease shall terminate shall be prorated to the date of termination." The petitioner was required to notify the public that the lessor was not responsible for the work or materials furnished on the leased property. Upon default by the lessee and due notice thereof, the lessor might terminate the lease and the lessee might remove its equipment from the property within six months thereafter. 136 After the execution of the agreement of September 1, 1941, the petitioner commenced the placer mining of the property covered by the agreement with Yuba and in 1941 paid to Yuba the sum of $26,290.10 under and pursuant to the terms of the agreement. In 1941 the petitioner paid to the Mammoth Gold Venture the sum of $12,960.55 under and pursuant to the provisions of the agreement of July 6, 1936, for and in connection with the operations conducted by the petitioner in that calendar year on the property which was the subject of the agreement with Yuba and not upon the Mammoth property. The sums paid, as hereinabove stated, by the petitioner to Mammoth Gold Venture were paid pursuant to the terms of the agreement of July 6, 1936, and the sums paid by petitioner to Yuba were paid pursuant to the agreement of September 1, 1941. The petitioner did not pay any other or further sums to Mammoth Gold Venture or to Yuba. In its income tax return for the calendar year 1939, the petitioner deducted from its gross income the sum of $17,238.92 which the petitioner in that year had paid to Mammoth Gold Venture. In his notice of deficiency in Docket No. 3284, the Commissioner disallowed such deduction. 137 As such disallowance increased net income in the same amount, the Commissioner increased percentage depletion to the extent of 50 per cent thereof, and the resulting increase in net income, as shown in the notice of deficiency, was $8,619.46. In its income tax return for the calendar year 1940, the petitioner deducted from its gross income the sum of $46,657.12, which the petitioner in that year had paid to Mammoth Gold Venture in respect of operations on its Mammoth property. In his notice of deficiency in Docket No. 3284, the Commissioner disallowed that deduction. As such disallowance increased net income in the same amount, the Commissioner increased percentage depletion to the extent of 50 per cent thereof, and the resulting increase in net income was $23,328.56. In its income tax return for the calendar year 1941, the petitioner deducted from gross income the following amounts: The sum of $38,171.25 paid to Mammoth Gold Venture, resulting from operations on its Mammoth property; The sum of $26,290.10 paid to Yuba; The sum of $12,960.55 paid to Mammoth Gold Venture, resulting from operations on that property which was the subject of the agreement with Yuba. The total138 of the amounts so deducted was $77,421.90. In his notice of deficiency in Docket No. 4074, the Commissioner disallowed the deductions. As the disallowance of such deductions and the disallowance of a further deduction in the sum of $303.03 (not in controversy) increased net income, the Commissioner increased allowable percentage depletion. The resulting increase in percentage depletion was the sum of $15,795.53, and the resulting increase in taxable net income was $61,929.40. Opinion VAN FOSSAN, Judge: The question before us is a simple one. Were the amounts paid by the petitioner, pursuant to the provisions of its agreements with Mammoth and Yuba, capital expenditures or were they excludible from the petitioner's gross income? The further point is raised that they may have been deductible from the petitioner's gross income either as rents or royalties or as ordinary and necessary business expenses. The answer to the question is found in the agreements themselves. We will first discuss the agreement of July 6, 1936, between the petitioner and Mammoth. A careful analysis of that instrument shows clearly that it is essentially a lease. Throughout the parties are characterized as139 lessors and lessee and their rights, privileges and prescribed conduct are wholly consistent with that relationship. It is unnecessary to state the features of this instrument which are peculiar to a lease. By reason of their reservation of reversionary and other rights, the lessors retained an economic interest in the minerals in place. The "rovalties" it received upon their removal, therefore, constituted income of the lessors and hence were excludible from the income of the petitioner lessee. In Commissioner v. Felix Oil Company, 144 Fed. (2d) 276, and Commissioner v. Anna Vickers Crawford, 148 Fed. (2d) 776, cases from the Ninth Circuit (in which the case at bar arises), the royalties were measured by a percentage of the net profits. So they are here. Consequently on the authority of these decisions we hold that the amounts of rovalties paid by the petitioner in the taxable years, as heretofore set forth, are not includible in the petitioner's income. The agreement between the petitioner and Yuba likewise exhibits the earmarks of a lease. In it, the lessor, the owner of the property, retained certain rights of forfeiture and re-entry and other reversionary140 rights which manifestly spell out an economic interest. Counsel for the respondent states. "if under the agreements here in question, the lessors retained an economic interest in the property, the amounts paid are deductible." The measure used to determine the royalties payable in the Yuba case was the aggregate net mint or smelter returns of all values recovered. We see no material difference between that "yard stick" and the net profits basis. In each the lessor and lessee adopted a method convenient for ascertaining the amount of royalties to be paid. The vital factor in problems of this kind is whether or not the relationship of lessor and lessee is established by the mining agreement and thus an economic interest is retained by the lessor. In both leases we have found that such an interest was retained and therefore we conclude that the royalties paid in the taxable years were not includible in the petitioner's gross income for those respective years. The case of Quintana Petroleum Co., 44 B.T.A. 624">44 B.T.A. 624, affirmed, 143 Fed. (2d) 588, on which respondent relies, involved an assignment and not a sublease and is, therefore, distinguishable. In view of this*141 determination it is unnecessary to discuss the deductibility of these payments either as "rents and royalties" or as ordinary and necessary business expenses. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620862/	The Friedlander Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentFriedlander Corp. v. CommissionerDocket No. 23046United States Tax Court1953 U.S. Tax Ct. LEXIS 207; 19 T.C. 1197; March 31, 1953, Promulgated 207 Decision will be entered under Rule 50. 1. Business Deduction. -- Rotary Club dues of petitioner's president and majority stockholder held not deductible.2. Salaries of Employees Disallowed in Part. -- Payment of salaries and bonuses paid to stockholder sons of administrative head of petitioner during period of employees' absence in military service, no replacements being required in the business, held properly disallowed in part by respondent.3. Partnership. -- Respondent determined a deficiency against petitioner on the theory that partnership made up of a portion of petitioner's stockholders was a sham. Petitioner seeks redetermination on the theory that the partnership was entered into in good faith for a business purpose and that business was actually carried on and income here involved earned by partnership. Stated business purpose was primarily to afford opportunity for development of ideas and capabilities of sons of majority stockholder, and to avoid disruption in corporate affairs arising through conflict of ideas and business practices between sons and other majority stockholder. Secondary business purpose to obtain tax benefits. Alleged partnership208 purchased several retail stores belonging to petitioner for that purpose. Sons in the armed services at all times during life of partnership except for latter portion thereof. Alleged partnership business carried on in same manner and under same management as before creation thereof. Held, partnership was not entered into in good faith for a business purpose and was a sham created to siphon off profits of petitioner for sole purpose of avoiding income tax. Respondent's determination of deficiency upheld. J. O. Gibson, Esq., and Waldo DeLoache, Esq., for the petitioner.Ralph V. Bradbury, Jr., Esq.,209 and Newman A. Townsend, Jr., Esq., for the respondent. Withey, Judge. Kern, J., dissenting. Arundell and Black, JJ., agree with this dissent. WITHEY1197 This proceeding involves the following deficiencies:Declared valueExcessYearexcess-profits taxprofits tax1942$ 2,126.13$ 9,414.6819434,038.3646,401.01194411,996.86101,016.74194520,663.37128,020.99The issues are whether the respondent erred in disallowing as deductions (1) the amount of $ 278 in the year 1943 as an expense for Rotary Club dues and (2) $ 825, $ 1,000, $ 1,480, and $ 1,932.50 in the years 1942, 1943, 1944, and 1945, respectively, of the total compensation paid to Irwin Friedlander and Max Friedlander, and (3) whether petitioner's income for the years 1943, 1944, and 1945 should include the income of Louis Friedlander & Sons, an alleged partnership or, 1198 in the alternative, whether certain deductions claimed by the petitioner for the years 1943, 1944, and 1945 are allocable to the alleged partnership. Other issues raised by the petition were conceded by the petitioner at the hearing.FINDINGS OF FACT.The facts set forth in a stipulation are210 found as agreed to therein.The petitioner, a Georgia corporation organized on August 19, 1929, has its principal place of business at Moultrie, Georgia. Its income and excess profits tax returns for the taxable years 1942 to 1945, inclusive, were filed with the collector for the district of Georgia.Louis Friedlander, hereinafter for convenience sometimes referred to as "Louis," president of petitioner at all times since its organization, was the sole proprietor of a dry goods store at the place of business of petitioner in Moultrie, Georgia, from about 1909 to 1911, when he and his brother Nathan formed a partnership to conduct the business. In 1926 the business was incorporated and upon the organization of petitioner in 1929 assets received by Louis as a stockholder in dissolution proceedings of the corporation were acquired by petitioner.In 1935 Louis transferred to each of six sons, Irwin, Malvin, Max, Richard, Herman, and Jack, without consideration, 125 shares of common stock of petitioner. A stock dividend paid December 1941 increased the holdings of each of the transferees to 175 shares.Between June 30, 1943, and March 31, 1946, the petitioner's outstanding capital stock211 consisted of 1,743 1/5 shares of common stock which was held as follows:Name and titleJune 30,July 1,Dec. 31,March 31,1943194319441946Louis Friedlander, Pres420 420 420 420 I. B. Perlman, Vice Pres245 245 350 350 B. M. Cohen2 4/52 4/52 4/52 4/5A. I. Halpert7 7 7 7 R. L. Powell, Sec. & Treas1 2/51 2/51 2/51 2/5Irwin Friedlander175 Malvin Friedlander175 Max Friedlander175 Richard F. Friedlander175 175 175 175 Herman Friedlander175 175 175 175 Jack Ira Friedlander175 175 175 175 United Investment Co437 437 Treasury Stock17 1 542 Total Stock1,743 1/51,743 1/51,743 1/51,743 1/5Louis and Esther Friedlander are husband and wife. I. B. Perlman is a brother of Esther and the husband of Fannye Perlman. R. L. Powell has been employed for many years by the petitioner as secretary and treasurer and has been in active charge of keeping its books of account212 and other records. B. M. Cohen is a brother-in-law of I. B. Perlman and Esther. A. I. Halpert was not related to Louis or I. B. Perlman.1199 From June 30, 1943, to March 31, 1946, the stock of the United Investment Co. was owned as follows:StockholderSharesEsther Friedlander28Irwin Friedlander18Malvin Friedlander15Max Friedlander14Louis Friedlander1Louis Friedlander, trustee forHerman12Louis Friedlander, trustee forRichard11Waldo DeLoache1The United Investment Co. is mainly in the real estate business although it does some financing and lending of money on a small scale. It owns considerable real estate, most of which is in Moultrie, including the main store building of petitioner and The Fair Store building. Louis is secretary and treasurer of the company.For a number of years prior to June 30, 1943, the petitioner operated a general merchandise business in a number of towns located in the southern part of Georgia and Alabama. The stores which the petitioner operated on June 30, 1943, were named and located as follows:Friedlander CorporationMoultrie, Ga.The Fair StoreMoultrie, Ga.Nettler's HardwareMoultrie, Ga.Smart ShopMoultrie, Ga.Friedlander'sFitzgerald, Ga.Perlman'sDothan, Ala.Farmers HardwareTifton, Ga.FamousAndalusia, Ala.1Fashion ShoppeDouglas, Ga.Fashion ShoppeThomasville, Ga.213 The Friedlander Corporation store included a wholesale department, a retail department, and an appliance department. Nettler's Hardware, a contiguous unit, was also operated as a department of the store. The stores in Douglas and Thomasville and the Smart Shop in Moultrie were ladies' ready-to-wear shops. The stores in Fitzgerald and Dothan stocked wearing apparel, piece goods, household furnishings, luggage, and other merchandise that could be sold promptly at medium prices. The Fair Store was an outlet store and sold only seconds and close-outs, mostly work clothes and shoes. It catered to the farm trade. Farmers Hardware in Tifton handled only hardware and houseware. Petitioner leased the buildings in which the out of town stores were operated. All units, except the Friedlander Corporation, were exclusively retail operations.Upon entering the regular employment of petitioner in 1940, Irwin and Max endeavored to put into practice ideas for the conduct of the business, including the sale of some of the stores and opening some small ready-to-wear shops, which conflicted with those of Perlman, 214 and as a result the sons and Perlman had quarrels, at times violent, about the matter, even though they recognized that Perlman got results. 1200 The sons and Perlman informed Louis of the prevailing condition, and he sought to correct it by a more definite assignment of duties for each so that there would be less personal contact. At one time a decision was reached to sell some of the stores and probably open one or two other stores to experiment with the ideas of Max and Irwin. By the time the sons entered the Navy, Perlman was practically in charge of the stores located outside of Moultrie and the sons were kept busy in the Moultrie stores. Perlman considered that his financial interest in petitioner was more important than his personal differences with them as to how the business of petitioner should be conducted. The differences between them were settled by Louis in a manner very satisfactory to Perlman before the sons entered the military service.Separate books of account were kept for each department of the petitioner's stores in Moultrie, Georgia, and for each of its stores located in other towns. The net profit from each operation was computed separately prior215 to July 1, 1943, and then consolidated for tax purposes.Irwin, Max, and Malvin served in the armed forces as follows:IrwinJanuary 1943 to January 1946MaxSeptember 1942 to November 1945MalvinFebruary 1943 to March 1946Irwin and Max returned from the service in November 1945 on terminal leave.On July 16, 1942, Irwin, Max, and Malvin executed an instrument the terms of which gave their father general powers of attorney. The instrument was recorded on December 11, 1943. In 1944 the sons executed supplemental powers which contained a general ratification of acts of their father under the July 16, 1942, powers of attorney.On about three occasions prior to July 1, 1943, commencing about September 1942, Louis discussed with petitioner's outside accountant and tax consultant the question of forming another organization to acquire some of petitioner's stores. Louis preferred to organize a corporation but being interested in reducing tax liability on any profits inquired, about June 1, 1943, whether there would be less tax liability if the stores were owned by a partnership. The accountant informed him that there would be and Louis then instructed the accountant to form216 a partnership as soon as possible. The accountant promptly prepared a rough draft of articles of copartnership and delivered it to petitioner's attorneys for completion. Louis informed him of the interest to assign to each of the contemplated partners. The accountant did not discuss the formation of a partnership or terms of a partnership agreement with any person other than Louis and petitioner's attorneys. Louis was never present when the subject was discussed 1201 by the accountant with petitioner's attorneys. Petitioner's income tax return for 1942 was filed on April 15, 1943, and was signed by Louis as president.On or about July 1, 1943, Louis and Perlman and their wives and Irwin, Max, and Malvin executed an instrument, the terms of which recite, among other things, that they agreed to form a partnership to conduct a general retail merchandise business under the name of Louis Friedlander & Sons, hereinafter for convenience only to be referred to as the partnership; the interest of Louis and Perlman and their wives in the assets and profits and liability for losses to be 10 per cent each and 20 per cent for each of the other individuals. The instrument provided that217 "From time to time the partners shall have such drawing accounts and such disbursements shall be made of the assets of the partnership, either division of profits or capital assets, as may be mutually agreed upon by the partners" and that in the management of the business Louis "shall be the Business Manager and Treasurer for the partnership with full authority to make purchases, incur obligations, make loans, secured or unsecured according to his judgment, and do any and all other acts incident, convenient and necessary to the conduct of the business." The agreement was to be effective for 5 years unless the partnership was dissolved as provided for in the instrument or by operation of law. Provisions in the instrument gave heirs or personal representatives of a deceased partner an election to continue as a partner and terms for the purchase of the interest of a deceased or retiring partner by the other partners. The instrument could not be amended without agreement of all of the designated partners.All parties signed the agreement except Malvin, who was then in New Caledonia, and Louis acted for him under the power of attorney he held. Malvin did not personally participate in218 the discussions leading up to the formation of the partnership and Max had no part in the decision to form a partnership. Irwin did not discuss any division of petitioner's business with his father until after he entered the Navy.The primary motive for forming the partnership was to reduce tax liability.On July 1, 1943, Max was in Norfolk, Virginia, Malvin was in New Caledonia, and Irwin was in Boston. On or about July 1, 1943, Louis, acting under the general powers of attorney, sold to petitioner at its par value of $ 17,500 the 175 shares of stock Max, Malvin, and Irwin each held in petitioner. Irwin did not make an investigation to determine the value of the stock or take part in the transaction. The stock had a value in excess of its par value. Petitioner's checks payable to the order of each seller bore the date of July 1, 1943. In July 1943 the checks were endorsed by Louis, acting under the powers of 1202 attorney he held, and delivered to the partnership as loans from his sons. As evidence of the loans the partnership issued its notes dated July 1, 1943, and maturing in 6 months with interest at the rate of 6 per cent. Irwin did not know that a note was issued219 to him. The checks were deposited by the partnership and paid by the bank on July 31, 1943. The sales of stock and loans were a part of the plan to organize the partnership. The original deposit pass books of the partnership disclosed the following other deposits in its bank account during the month of July 1943:July 7, 1943$ 250July 13, 19431,500July 26, 19434,000The partnership purchased as of July 1, 1943, for $ 111,718.90 the assets and assumed the liabilities of the stores belonging to the petitioner, except the Friedlander Corporation, Nettler's Hardware and Famous stores, in payment of which it gave its check for $ 52,500 and a note, dated July 1, 1943, in the amount of $ 59,218.90 for the balance. Nettler's Hardware was retained by petitioner because of the location and close connection with the main store.The note for $ 59,218.90 was paid by November 24, 1943, and the amount borrowed from Max, Malvin, and Irwin was paid with interest on August 14, 1945. The amount of $ 17,500 received by each of the sons was immediately loaned to the United Investment Co. All of these transactions were handled by Louis acting through powers of attorney. The indebtedness220 of the United Investment Co. to the sons is renewed each year and a new note is issued for the interest and principal.Physical inventories were taken of each store on or as of July 1, 1943, and the merchandise therein was transferred to the partnership at the invoice cost price of $ 91,273.81. At that time the stores had an ample stock of scarce goods, no more than a normal amount of which was obsolete and unsalable. Merchandise then available in the open market was mostly of inferior quality. Accounts receivable were transferred for three-fourths of face amount, or $ 8,682.03, which was a very high price. Less than 50 per cent of the amount of the receivables was collected by the partnership. The fixed equipment sold to the partnership was transferred at book value, except equipment at The Fair Store and Fitzgerald store which was fully depreciated and was transferred for $ 500 each. The partnership agreement was recorded in all of the counties in which the stores were located. The recordation respecting three of the stores was made on July 2, 1943.When merchandise was placed in the stores of petitioner for sale, the invoice cost price was increased 20 per cent because of221 sales to 1203 clerks in the stores. Petitioner determined that the mark-up on sales to clerks was necessary to enable it to recover its entire cost of the goods.There were no corporate minutes of the petitioner with reference to any matter during the period 1942 to 1946, inclusive, other than one entry pertaining to Office of Price Administration certificates.Subsequent to June 30, 1943, and until March 31, 1946, the operations of the stores acquired by the partnership were recorded on the books of account of, and disclosed on information returns filed by, the partnership.During the period beginning June 30, 1943, and ending March 31, 1946, separate books of account were maintained by the petitioner and the partnership. The petitioner's books were kept and its tax returns were filed on the accrual and a calendar year basis. The books of account and tax returns of the partnership were kept and filed on the accrual basis and a fiscal year ending June 30.On July 1, 1943, the approximate net worth of Esther, Louis, Max, Malvin, and Irwin Friedlander, and I. B. Perlman was as follows:Esther Friedlander$ 250,000Louis Friedlander200,000Max Friedlander100,000Malvin Friedlander100,000Irwin Friedlander100,000I. B. Perlman100,000Total$ 850,000222 The partnership made purchases from the petitioner during the fiscal years ended June 30, 1944, and June 30, 1945, and the taxable period ended March 31, 1946, in amounts as follows:Taxable year endedAmountJune 30, 19441 $ 77,493.32June 30, 194584,215.58March 31, 194683,413.70Total$ 245,122.60The sales were made at 5 per cent over invoice cost to petitioner, without adjustment for discount taken by petitioner in connection with the purchase of the goods, which averaged about 2.68 per cent. Sales of similar merchandise were generally made by petitioner to other purchasers at prices computed by the same method.The total wholesale sales of the petitioner for the years in question were as follows:1943$ 424,657.711944123,012.08194595,372.251204 The store managers have always been responsible to both Perlman and Louis Friedlander, but Perlman was in actual contact with the units more than was Louis Friedlander.Most of the merchandise in the stores was purchased by the store managers under the supervision of Perlman. The hardware stores buy almost all of their merchandise direct from the223 trade. Of the total sales volume of wearing apparel, 65 per cent was of women's apparel. There is considerably more work involved in women's ready-to-wear due to the change in fashions.The partnership maintained its principal bank account at Moultrie National Bank, Moultrie, Georgia, until March 31, 1946. There was no signature card in the bank files for the account. All of the checks drawn on the account were signed either by Louis Friedlander, R. L. Powell, or I. B. Perlman.Louis Friedlander exercised control over the affairs of the petitioner and the partnership. Prior to July 1, 1943, most of the duties consisted of handling financial matters. Only a small part of his time was devoted to merchandising. Other services were performed in supervising some of the departments of petitioner, principally the hardware department.In 1940, when Max and Irwin entered the regular employment of petitioner, the business of petitioner was divided. Louis took charge of and did the buying for the men's department and was assisted by Max. Perlman took over and did the buying for the women's department, assisted by Irwin. Subsequent to July 1, 1943, Louis' duties were substantially the224 same.Perlman has been associated with the business continuously since about 1918 and has been a particularly useful employee and officer. Prior to July 1, 1943, he was practically in charge of the ladies' departments and stores outside of Moultrie and devoted a considerable part of his time to the work. He also was the "merchandise man," i. e., he bought ladies' apparel, did supervisory work, planned sales and performed other allied work and at all times important did most of the merchandising work for petitioner and the partnership. His duties were substantially the same after July 1, 1943, except that he spent more time in Moultrie on account of the absence of Max and Irwin in the service. Perlman normally went to the markets in New York, Baltimore, Philadelphia, and Atlanta a total of four to seven times a year. He did not have a regular, monthly travel expense allowance as did Louis, but was reimbursed for actual expenditures by the petitioner. He traveled to and from the partnership stores in his personal car and sometimes in the petitioner's car, gasoline rationing being a factor in the use of his personal car during the war.Max was born in 1920. He worked in the business225 during spare time from the time he was a young boy. By 1940 he had considerable 1205 knowledge of the business. Max was graduated from Duke University in June 1940 and thereafter returned to Moultrie and went to work in the men's department of the store on a full time basis and had some charge of the department. He enlisted in the Navy in August 1942 and after about 4 months of duty in the United States was assigned to convoy duty for 6 months, during the course of which he reached a port in this country about every 5 weeks. Thereafter he was stationed at Norfolk. After Max returned from the service about the middle of November 1945 he took over the buying and merchandising of the men's department in the partnership stores. He was also placed in charge of a men's ready-to-wear store in Thomasville, which included the negotiation of a lease for the building and purchase of merchandise. The manager of the store was placed under his supervision.Irwin was born in 1916 and is the oldest son of Louis. He has performed services of some kind for the Friedlander enterprises since he was about 8 years of age. The nature of the work assigned to him depended upon his age and ability. 226 By the summer of about 1935 when he was in his junior year at Duke University he was engaged in sales work. He opened the store at Dotham, Alabama, the next summer and operated it until September of that year. Upon graduation from Duke University in 1937 he went to work with L. Bamberger Co. of Newark, New Jersey, a branch of R. H. Macy & Co., for the purpose of obtaining experience in modern merchandising. After working 2 years with that company as salesman and assistant buyer, he returned home for a couple of months but returned to New York City after persuading his father to change the petitioner's account to the buying firm in New York City which was then employing him.Irwin worked regularly for the petitioner from about March 1, 1940, until December 27, 1942. His ambition was eventually to be placed in charge of the entire business. During the first year he was an assistant to Perlman in the ladies' department. Thereafter he was supposed to take over the duties of Perlman in petitioner's store and Perlman was to take charge of the stores in the field. Instead he had complete charge of the toy department, worked with Max in advertising and Perlman in the ladies' departments, 227 did some buying and exercised some supervision over the personnel of the women's departments. Upon entering the Navy in January 1943 he was first assigned to duty in Charleston, South Carolina, for 13 weeks, and then to Harvard University for about 4 months. He returned home twice while at Charleston but at no time thereafter until he returned from the service about the middle of November 1945. He has been associated with the business at all times since then. When Irwin reentered active employment after his discharge from the Navy, he 1206 resumed his former duties. At that time his father was in charge of all the men's departments and Perlman was in charge of all the women's departments.Malvin, during all of the taxable years, was a musician and did not render any services or devote any time to the business of petitioner or the partnership.On one or more occasions after July 1, 1943, petitioner depleted its stock of letterhead stationery. On February 7, 1948, R. L. Powell wrote a letter as a representative of petitioner on letterhead stationery of petitioner containing the following: The Friedlander CorporationJobbers, Commission MerchantsChain Store Operators228 A comparative balance sheet of the partnership for the periods under review is as follows:ItemsJuly 1, 1943June 30, 1944Assets:Cash on hand$ 370.00$ 755.00Cash on deposit1,000.0052,703.63U. S. Treasury bonds26,000.00Accounts receivable8,682.0314,388.83Merchandise inventory91,273.81103,333.40Meter deposits120.00120.00Prepaid taxes, licenses, etc37.50182.63Leasehold improvements309.47257.47Furniture and fixtures9,926.0910,729.05Notes receivableTotal$ 111,718.90$ 208,470.01Liabilities and net worth:Owing employees$ 31.25Trade payables50,562.98Notes payable$ 111,718.9052,500.00Accrued expenses11,735.34Reserve for bad debts2,067.72Reserve for depreciation1,038.21Reserve for amortization171.64Capital accounts90,362.87Total$ 111,718.90$ 208,470.01ItemsJune 30, 1945Mar. 31, 1946Assets:Cash on hand$ 755.00$ 955.00Cash on deposit100,255.4216,212.03U. S. Treasury bonds78,000.00127,000.00Accounts receivable11,959.0277,199.75Merchandise inventory95,343.72158,376.60Meter deposits120.00120.00Prepaid taxes, licenses, etc247.75412.93Leasehold improvementsFurniture and fixtures12,543.0513,925.08Notes receivable35,000.00Total$ 334,223.96$ 394,201.39Liabilities and net worth:Owing employees$ 41.25Trade payables40,273.21$ 52,260.94Notes payable52,500.00Accrued expenses16,858.859,572.94Reserve for bad debts1,779.261,779.26Reserve for depreciation2,254.483,224.54Reserve for amortizationCapital accounts220,516.91327,363.71Total$ 334,223.96$ 394,201.39229 The net earnings of the petitioner and the partnership for the periods indicated were as follows:NameYear endedNet incomeThe Friedlander CorporationDec. 31, 1937$ 5,822.87 Dec. 31, 19386,229.26 Dec. 31, 19398,870.30 Dec. 31, 1940(595.25)Dec. 31, 194126,744.74 Dec. 31, 1942106,584.32 Dec. 31, 194383,717.64 Dec. 31, 194463,531.82 Dec. 31, 194582,243.36 Louis Friedlander & SonsJune 30, 194490,362.87 June 30, 1945171,110.40 Mar. 31, 1946(9 mos.)133,681.65 1207 The main office of petitioner and the partnership were at the same location in Moultrie and the books and records for both were maintained in that office by the same personnel. Petitioner paid the rent for the entire building and the salaries of the employees. The salaries paid the office personnel were $ 7,140.52 in 1943, $ 8,692.63 in 1944, and $ 7,594.09 in 1945 and were paid by the petitioner without reimbursement by the partnership for its pro rata share of the expenses.The petitioner did not charge the partnership with any amount for joint use of utilities or furniture and fixtures. Exclusive of the salaries of Louis and Perlman, the petitioner 230 paid all of the general administrative expenses of the main office in Moultrie. Except for small amounts, all of the legal, accounting and professional expenses of petitioner and the partnership during the taxable years were paid by petitioner and deducted in its returns. The amount of such expenses paid by the petitioner during the calendar years 1943, 1944, and 1945 were $ 3,927.31, $ 2,152.10, and $ 2,948.11, respectively. The books of the partnership disclose legal and accounting expenses of $ 9, $ 111, and $ 200 for the fiscal periods ended June 30 in 1944, 1945, and March 31, 1946, respectively.Louis and Perlman made frequent trips to and from the stores of the partnership. A passenger car of petitioner was used at times to make the trips but the partnership was not charged any amount for operating expenses of the automobile. Louis had a monthly allowance of $ 100 for traveling expenses and received reimbursement for expenses on trips to markets. Perlman was reimbursed for traveling expenses.During the taxable years petitioner and the partnership used the services of resident buyers to purchase merchandise. One of the agents rendered services for each but the partnership231 was not charged for any of the expense. Louis and Perlman made trips each year to markets to purchase merchandise for petitioner and the partnership. Managers of the stores of the partnership generally accompanied Perlman on the trips to select merchandise for their stores. The books of the partnership contain only three charges for traveling expenses of Louis and Perlman, all of which, totaling $ 410, were made during the last taxable year of the partnership. The books of the partnership contain no charges for traveling expenses of store managers other than the following:Fiscal yearsStore194419451946Dothan$ 245.13Fitzgerald139.91Smart Shop20.00Tifton$ 27.25$ 29.0017.00Thomasville215.0032.00Fair Store185.601208 Louis and Perlman made long distance calls from the Moultrie stores in connection with the purchase of merchandise for stores of the partnership, the charges for which calls were paid by petitioner without reimbursement by the partnership.The merchandise of petitioner and the partnership was covered by one policy of insurance. The partnership was charged for its pro rata share of the premiums. 232 During the taxable years 1942 to 1945, inclusive, the petitioner paid salaries as follows:Name1942194319441945Louis Friedlander$ 14,000.00$ 15,400.00$ 15,200.00$ 15,200.00I. B. Perlman8,600.0010,561.109,463.009,464.75Irwin Friedlander4,900.005,000.005,300.005,410.00Max Friedlander3,725.003,800.003,980.004,322.50Esther Friedlander172.00168.00202.0328.05Fannye Perlman124.50104.0078.558.25The regular salary of Max in 1941 was between $ 150 and $ 200 per month. Irwin was paid approximately $ 250 per month during the latter part of 1941. Louis was absent from the business during the last months of 1941 due to an injury. Max and Irwin assumed added responsibilities during the period of his absence and each received a bonus of $ 2,000 for 1941. Louis returned to work during the early part of 1942. During the period 1942 to 1946, inclusive, Louis' health was not good, but he was active in the financial management of the business. He spent about 3 weeks in a hospital in Rochester, Minnesota, in January of 1943. The medical treatment he received improved his health but he was advised to take it easy. Even when233 sick he never relinquished the financial control of the business.In each of the taxable years all of the employees of petitioner were paid a bonus. The bonuses paid to Max and Irwin were based upon the same percentage that was used in computing the bonuses paid to other employees.Louis and Perlman received salaries from the partnership as follows:LouisI. B.Fiscal year endingFriedlanderPerlmanJune 30, 1944$ 7,000$ 3,000June 30, 1945$ 7,000$ 3,000Mar. 31, 1946$ 5,250$ 2,250In his determination of the deficiencies, respondent allowed each year as reasonable compensation for Irwin the amount of $ 4,300 and $ 3,500 for Max and disallowed the remaining amounts claimed as deductions for salary paid to them.1209 The credits to the capital accounts of the partners, withdrawals therefrom and balance on March 31, 1946, were as follows:CreditsNameWithdrawalsBalanceSalaryProfitsFannye Perlman$ 36,765.49$ 36,765.49Esther Friedlander36,765.491 $ 437.8836,327.61I. B. Perlman$ 8,25036,765.5018,960.3226,055.18Louis Friedlander19,25036,765.5030,931.5525,083.95Max Friedlander73,530.983 16,461.4657,069.52Malvin Friedlander73,530.982 500.0073,030.98Irwin Friedlander73,530.982 500.0073,030.98234 At some undisclosed time the tax consultant who advised Louis on the creation of the partnership was consulted on whether the partnership form was the most advantageous at that time for tax purposes and his advice was that there was no tax advantage at that time. Thereafter Louis Friedlander & Sons, Inc., was organized as a corporation under the laws of the State of Georgia on April 1, 1946, to take over the assets and liabilities of the partnership at book value. Its capital stock, consisting of 1,250 shares, par value $ 100 each, was issued to the members of the partnership in proportion to their partnership interests.The stockholders were charged par value for stock of the new corporation and the balance in their capital accounts in the partnership after the charges were entered in the books of the new corporation as an account payable. The amounts so entered and the credit balance in the accounts on April 27, 1951, were as follows:CreditBalanceNameApr. 1, 1946Apr. 27, 1951Fannye Perlman$ 24,265.49$ 24,265.49Esther Friedlander23,827.6118,827.61I. B. Perlman13,555.181 6,651.19Louis Friedlander12,583.9583.95Max Friedlander32,069.522 5,946.87Malvin Friedlander48,030.9813,638.40Irwin Friedlander48,030.983 5,078.67235 At the time of the hearing herein Fannye Perlman was constructing a more pretentious home in Moultrie. Prior thereto she informed Louis of her intention to demand payment of the amount due her from the new corporation.The officers of the new corporation are Louis Friedlander, president; I. B. Perlman, vice president; Irwin Friedlander, vice president; 1210 Max Friedlander, secretary-treasurer. Louis exercises control over the activities of the new corporation. For the fiscal year April 1, 1946, to December 31, 1946, the following salaries were paid by the new corporation:Louis Friedlander$ 5,050.00I. B. Perlman2,137.50Irwin Friedlander660.00Max Friedlander660.00Perlman and Irwin devote about 75 and 5 per cent, respectively, of their time to the affairs of the new corporation.In his determination of the deficiencies respondent held that the income reported by the partnership constituted income taxable to236 petitioner under the provisions of section 22 (a) of the Code and after recomputing it on a calendar year basis included the amount thereof in gross income of petitioner, $ 45,428.33 in 1943, $ 131,192.93 in 1944, and $ 174,623.62 in 1945.The parties to the agreement of July 1, 1943, did not in good faith, and acting with a business purpose, intend to join together as partners in the present conduct of an enterprise.Louis has been a charter member of the Rotary Club of Moultrie, Georgia, since 1922. Some of the leading business and professional men of Moultrie were members of the club. Louis was a regular attendant at meetings of the club when in Moultrie. He did not associate his membership in the club with petitioner's business. Petitioner did not claim as a deduction prior to 1943 any amount for Rotary Club dues. In its return for 1943 it claimed the amount of $ 278 as a deduction for Rotary Club dues. The amount was an accumulation of Rotary Club dues for prior years which had been billed to and paid by Louis. In his determination of the deficiency for 1943 respondent disallowed the deduction on the ground that the dues did not constitute an ordinary and necessary business237 expense.OPINION.Petitioner contends that the membership in the Rotary Club afforded an opportunity for Louis, its president, to contact leading business and professional citizens of the community and create good will for the business. Substantial evidence is required to establish a right to deduct club dues as a business expense. . Cf. .The fact that Louis paid the sum out of his personal funds during the course of his membership in the club for 21 years prior to the taxable year without any contention or proof that he sought reimbursement from petitioner or its predecessors, infers that he did not 1211 regard the cost as an ordinary and necessary business expense of his employer. He was prompted, according to his testimony, to seek reimbursement from petitioner in 1943 by advice from an unknown source, that petitioner should and could under the provisions of the Internal Revenue Code pay the expense. The effect of other testimony of Louis is that he regarded his membership in the club as having no connection with the business of petitioner. 238 The evidence here does not justify a reversal of the respondent's action in denying the deduction. Accordingly, we sustain his determination that the amount is not an ordinary and necessary business expense of petitioner.Of the salaries of $ 4,900, $ 5,000, $ 5,300, and $ 5,410 paid to Irwin during the respective taxable years, respondent allowed $ 4,300 each year and of the amounts of $ 3,725, $ 3,800, $ 3,980, and $ 4,322.50 paid to Max, he allowed $ 3,500 each year. The salaries paid included bonuses at the rate paid other employees, but the amount has not been shown.Irwin and Max were employees of petitioner in 1941 but the amount paid to each was not shown by evidence in this proceeding. Petitioner asserts in its proposed findings that during the taxable years they were paid at the same rate as in 1941, plus an additional amount under a bonus system applied to all employees and refers to the approval of the 1941 compensation by this Court in a memorandum opinion entered in Docket No. 2053.That proceeding involved the disallowance by the Commissioner of a special bonus of $ 2,000 paid to each, out of a total salary of $ 4,402.53 paid to Irwin and $ 3,501.26 paid to Max. 239 We found that the regular salary of Irwin was $ 2,150 and of Max $ 1,375 and that the remainder paid to each consisted of a bonus paid to all other employees. Louis testified here that he testified in that proceeding that the special bonus was paid because, among other things, of additional responsibilities assumed by Irwin and Max during his absence from the business on account of sickness. That fact was considered by us in reversing the respondent's action and allowing the entire amount as a deduction. No contention is made that they had additional responsibilities in 1942.Irwin was absent in military service from January 1943 until November 1945 and Max from September 1942 until the same time and consequently performed no service for petitioner during such times.Salaries paid to employees during absence in the military service are allowable as deductions upon the ground that they are "justified by past services and an employer's advantage in retaining the services of experienced personnel when released from service." .1212 The effect of the respondent's determination of $ 4,300 as reasonable compensation for240 Irwin and $ 3,500 for Max was to allow the special bonus again in 1942, when Max was absent in military service for about 4 months, and in subsequent taxable years when both of them were on duty with the Navy until November 1945. Here, where the employees were stockholders and sons of the administrative head of the business, the motive for the payments is important. . It does not appear from the evidence that replacements were required during the absence of the employees or that salary payments were required to insure their return to the business after their discharge from the Navy.Under the facts of record we are not warranted in disturbing the salary allowances made by the respondent. Accordingly, we hold for the respondent on this issue.The third and primary issue is whether, as determined by respondent, the petitioner is taxable on the income of the partnership. The petitioner contends that the partnership was not a sham, and, therefore, should be recognized for tax purposes as a separate and distinct enterprise. The broad contention of respondent is that the various steps taken were paper transactions, without a sound241 business purpose, to siphon off income of petitioner for the temporary benefit of its two controlling stockholders.An established rule is that a taxpayer may select any form of organization through which to conduct business and is under no compulsion to adopt a type that will yield the greatest amount of tax revenue. , and cases collected therein on the point. In that case we said:However, if the form of a business enterprise which a taxpayer adopts is a sham and a device to evade the burden of taxation, the law allows looking through the form to reality and disregarding the selected form of the business. ; .See also , in which the Court said that "Escaping taxation is not a 'business' activity."The device employed here was a dual family partnership to own and operate six of the nine stores being conducted by petitioner. Family partnership not created in good faith242 for a business purpose may be disregarded and the profits from operations "taxed to him who earns it," .Petitioner asserts that after prolonged discussion between and among Louis, Perlman, and the three Friedlander boys a determination was made in the fall of 1942 to set up for the boys a business which they could manage and control upon their return from military service and that 3 or 4 months later Louis requested petitioner's accountant 1213 to draft, with assistance of counsel, articles of copartnership containing provisions for the acquisition and operation of stores outside of Moultrie and the Smart Shop in that city. The alleged purpose is contrary to the facts of record.No proof was made of the alleged determination by all of the interested parties at any time prior to the execution of the partnership agreement. Malvin, who did not enter military service until February 1943, did not participate in the discussions, and Max took no part in the final discussion to form a partnership. Irwin did not discuss a division of the business until after he entered the service of the Navy in January 1943, 243 and Perlman could recall no discussion on the subject until the early part of 1943. No contention is made that the wives ever participated in consideration of the plan, or that they "rendered any services to the partnership which would have the effect of validating it." It was not until about June 1, 1943, which was after petitioner's income tax return for 1942 was filed, that Louis requested the accountant "to get busy" and create a partnership as soon as possible. None of the alleged partners other than Louis conferred with the accountant on the subject and it does not appear from the evidence that they were aware of any of the terms of the agreement until it was presented to them for signature. The inference from the facts is that Louis dictated the plan and that the other partners accepted, without protest, whatever he chose to do. The point has particular significance because six of petitioner's stockholders, who held about 30 per cent of its stock, were not assigned partnership interests and the wives were not stockholders. The result was a division of corporate assets disproportionate to stockholdings. There is no indication in the evidence that nonparticipating stockholders244 of petitioner were consulted. Any bona fide division of corporate activities for business purposes would have recognized the interests of the minority.Petitioner's position with respect to the business purpose which necessitated creation of the partnership may be broadly stated as follows: that it was, prior to the formation of the partnership, a closely held dual family corporation with the exception of some very minor stockholders; that disputes arising between Louis' sons and Perlman because of their greatly divergent views on the subject of merchandising were a disrupting unhealthy factor in the conduct of corporate business affairs; that the partnership provided a means whereby a complete separation of fields of authority would be obtained and also provided a business separate from the corporation in which the sons' ideas and business capabilities could be put to use and developed.That the purpose above stated was not in the minds of the parties to the partnership agreement becomes fairly obvious in the light of circumstances existing at the time the partnership was created and in 1214 the light of events subsequent thereto. On July 1, 1943, the date of execution of245 the partnership agreement, all three of Louis' sons were in the armed services. Their availability to participate in partnership affairs could not then be anticipated. Their discharge from the armed services would occur at some unascertainable future time. Certainly they were not in a position to be a disruptive influence in corporate affairs while so engaged, and they were certainly not then in a position to manage partnership affairs. It is also worthy of note that the term of the partnership agreement was only 5 years. So short a term is more consistent with an intent to adopt the partnership form for tax reasons only, than with an intent to provide a real and permanent business organization for the development of the business ideas and capabilities of very young men. That such was not the real purpose behind the creation of the partnership is apparent when it is considered that Perlman, the arch rival of the sons in merchandising matters, was the person who, during the sons' absence and thereafter, managed the stores held by the partnership with the same authority and in the same manner as when said stores were owned by the petitioner. In fact, we are unable to discover246 any real difference in the fields of authority and methods of conducting business on the part of Louis and Perlman after creation of the partnership. In view of the foregoing we are forced to the conclusion that the creation of the partnership was for the sole purpose of siphoning off the profits of petitioner with resulting tax benefits being the ultimate goal.The transfer of assets did not flow from an arm's length transaction. The merchandise, scarce at that time, was transferred at mere invoice cost price, and, therefore, excluded amounts for transportation, handling and other charges that enter into the total cost of goods. It discloses a purpose of petitioner to place others in a position to make profits at its expense; a release of earnings without consideration. . Aside from the transfer of merchandise at less than actual cost to petitioner, no consideration was paid for the value of the stores as going concerns. The large amount of good will value of the stores is demonstrated by the earnings of $ 395,000 of the partnership during its existence of 33 months without a cent of capital contributions, an amount247 of earnings $ 166,000 in excess of the net income of petitioner for the calendar years 1943, 1944, and 1945.The fact that some consideration was given as early as September 1942 to a plan for dividing the business of petitioner is not decisive. The evidence here does not disclose any of the details of the scheme considered at that time, and, therefore, we are not in a position to say to what extent they were put into effect. Our answer must be found in what was actually done.1215 In , there was a severance of nondependent divisions of the enterprise in an arm's length transaction. In , affd. , the corporations organized to sell the corporate taxpayer's products had essentially the same stockholders and were held to have been organized for business purposes. Legitimate business reasons were the basis for the division in .Here there was no substantial change in the operation of the stores after they were transfererd to the partnership. 248 Petitioner's officers continued to operate the stores without any material change of procedure and petitioner paid, without apportionment, numerous classes of expenses that would be chargeable to an independent entity. The outward appearances of separateness are frequently found in division of a business amounting to no more in the final analysis than paper transactions.Louis, the architect of the plan, testified, in effect, that taxation was the predominant motive for the creation of the partnership. Such a purpose, if the plan for its accomplishment is not unreal or a sham, is of course not fatal, but the separation here was only nominal and availed of for the obvious intent of temporarily reallocating, without consideration or business reasons, petitioner's income among family groups of petitioner's selection. Only by its action could a scheme of the kind involved here have been put into effect. Such anticipatory arrangements are ignored for tax purposes. ; .Decision will be entered under Rule 50. KERN Kern, J., dissenting: Two things249 should be stressed in a consideration of this case: (1) it does not present the usual "family partnership" question, and (2) it does not involve the application of section 45 of the Internal Revenue Code, under which the Commissioner might allocate income or deductions between the corporation and the partnership in order to clearly reflect the income of both, but involves the application of section 22 (a). In order to reach the result reached by the majority herein it is necessary to conclude that there was, in reality, no partnership in existence during the taxable years, regardless of who the partners were. For example, it would not be enough to conclude that the Friedlander sons were not bona fide partners; it would be necessary to conclude that there were not any bona fide partners, and that even a partnership composed of Louis Friedlander and Perlman was a sham and without reality.1216 My interpretation of the facts is that a partnership was formed by some of the petitioner's stockholders, that petitioner transferred certain of its assets to the partnership, that the partnership paid petitioner for these assets, that the partnership used these assets in the conduct250 of the business for which it was formed, that the partnership actively carried on a business during the taxable years, that the income from this business was distributed to the partners, that petitioner corporation did not earn or receive this income, and that the assets of the partnership eventually went into the hands of another corporation, none of the stock of which was owned by petitioner. This being my interpretation of what I consider to be the pertinent facts, I am unable to agree with the conclusion of the majority that the partnership was a sham.The reality of a business organization is not to be tested by the motive leading to its formation, but by the purpose which it accomplishes and performs. See , affd. . In the instant case, where the partnership took over a business and operated it for several years, it would appear to me to have been formed for a business purpose even though the motive of the individuals leading to its formation was to minimize taxes.The fact that the partnership acquired its assets from petitioner at a more reasonable price than*251 it could have acquired similar assets from another source and the fact that the partnership was not composed of all of petitioner's stockholders seem to me to be immaterial. Even though it be granted arguendo that the partnership was conceived in iniquity, nevertheless, it was conceived and came into being, and, in my opinion, it can not be disregarded as never having been in existence.The case of , affd. , and the Buffalo Meter Co. case, the Chelsea Products, Inc., case and the Palm Beach Aero Corporation case, cited in the majority opinion, appear to me to be in basic conflict with the result reached by the majority herein. I therefore respectfully note my dissent. Footnotes1. Sold Dec. 31, 1944, at par, 105 shares to I. B. Perlman, and 437 shares to the United Investment Co.↩1. The stipulation includes this unit but it is not referred to in other evidence.↩1. Does not include opening inventory.↩1. To pay gift tax.↩3. To pay Federal and state income taxes↩2. To pay estimated income taxes for 1944.↩1. Debit balance.↩2. Includes adjustment for additional credits totaling $ 2,110.30.↩3. Includes adjustment for additional credits totaling $ 3,545.54. Except for about $ 500 each year, all of the amounts withdrawn were used to pay taxes.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620864/	Sterling Beckwith and Frances Beckwith v. Commissioner.Beckwith v. CommissionerDocket No. 2606-62.United States Tax CourtT.C. Memo 1964-254; 1964 Tax Ct. Memo LEXIS 85; 23 T.C.M. (CCH) 1537; T.C.M. (RIA) 64254; September 28, 1964John F. Creed, 1 N. LaSalle St., Chicago, Ill., and Donald Flynn, for the petitioners. Donald J. Forman, for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: Respondent determined deficiencies in the petitioners' income tax for the years 1958, 1959 and 1960 in the respective amounts of $465.54, $980.66 and $1,212.81. In an amendment to his answer the respondent claimed an additional income tax deficiency for 1959 in86 the amount of $288. The issues are (1) whether petitioner was engaged in the business of farming in the years 1958 through 1960 so that losses incurred by him in the operation of a farm during those years would be deductible by him; (2) whether petitioner is entitled to nonrecognition of gain realized from the sale of his residence in 1959 within the meaning of section 1034 of the Internal Revenue Code of 1954; 1 and (3) whether petitioner is entitled to deduct as business expenses certain insurance premiums (workmen's compensation insurance and liability and fire insurance) paid in 1959 and 1960. Findings of Fact Some of the facts were stipulated and they are so found. Sterling Beckwith and Frances Beckwith, husband and wife, filed their joint income tax returns for the years 1958, 1959 and 1960 with the district director of internal revenue at Chicago, Illinois. Sterling Beckwith will hereinafter be called the petitioner. Petitioner is an engineer, with degrees in general engineering and electrical engineering. About 1935 petitioner obtained87 employment in Milwaukee, Wisconsin, with Allis-Chalmers, where his duties consisted of designing large rotating machinery. In April 1951 petitioner purchased a residence in Lake Forest, Illinois, for $40,500, and during the years 1951 through 1959 he claimed and was allowed depreciation deductions totaling $1,920 for a one-sixth use of the residence in his engineering business. The Lake Forest residence, which had an office and a small area for shop use, subsequently became inadequate for petitioner's engineering business, and after inspecting 12 to 15 farms within a reasonable distance from the area in which he conducted his engineering business, petitioner on or about October 23, 1958, contracted to purchase for $87,500 a tract of land consisting of about 80 acres located in Libertyville, Illinois. The seller agreed in the contract to convey the property on November 10, 1958. The warranty deed to the Libertyville property was notarized on November 8, 1958 and filed for record on November 10, 1958. The closing statement for the transfer of the Libertyville property was dated November 10, 1958. On May 19, 1959 petitioner contracted to sell his Lake Forest residence for a price88 of $60,000, later reduced to $59,000. On November 10, 1959 petitioner executed a warranty deed and conveyed his Lake Forest residence to the purchaser. The buildings on the Libertyville property included a five room house, a barn that was 50 feet by 90 feet, and several other structures, including a silo, a corn crib (about 500 bushels), a chicken shed, a wheat storage shed, a pump house and a machinery or tool shed (about 24 feet by 48 feet). At the time of acquisition of the approximately 80 acre tract, 47.5 acres were tillable, and 37.9 acres out of the tillable portion were held in reserve under a soil conservation contract entered into by the prior owner with the United States Department of Agriculture and continued by petitioner. Petitioner did not renew the soil conservation contract when it subsequently terminated in 1961. About 27 or 28 acres of the Libertyville tract consisted of marshland and some wooded area. The prior owner had drained some of the marshland so that it was suitable for farming purposes. The purchase price of $87,500 paid by petitioner for the Libertyville property included 22 items of equipment, most of which was farm equipment. Soon after acquiring89 the Libertyville tract, petitioner put a concrete floor and ceiling in the machinery shed and insulated the entire building. Petitioner equipped the machinery shed as an engineering laboratory, installed a welding machine in the pump house, and installed some engineering equipment in the barn. During the years 1958, 1959 and 1960 petitioner spent about 60 hours a week on his engineering work, and, in addition, devoted some of his time to other personal development projects. One such project was a sixrotor helicopter, which petitioner had been experimenting with since about 1935 or 1936. A two-rotor air cushion vehicle was a part of petitioner's multi-rotor project, and after he acquired the Libertyville property in 1958 he conducted three or four flights with the two-rotor vehicle on the property. Prior to 1958 petitioner had conducted flights with both the six-rotor and the two-rotor vehicles on property made available through friends. Petitioner was also interested in (1) a project involving the automatic guidance of tractors and (2) experimental seed planting. Petitioner purchased seed in the amount of $20 in 1959 and 1960 and, after purchasing a corn planter in 1959 for $125, 90 he planted about nine acres in corn in both years. Petitioner did not harvest the corn crop in either 1959 or 1960. The conservation crop was a hay crop, which petitioner did not harvest or put to grazing uses during the years before us. No livestock was kept on the Libertyville property by petitioner during the years before us. Petitioner did not employ a farm manager or any regular farm employees, but during 1959 and 1960 petitioner on occasion hired part-time help to cut and mow the soil conservation area or to perform general duties on the property. Apart from checks and bills, the petitioner did not maintain regular books and records for any farming operations during the years 1958 through 1960. The only income received and reported by petitioner as farm income in 1959 and 1960 was in the amount of $416.90 and $521.81, respectively, which represented payments under the soil conservation contract. The schedule of farm income and expense (Schedule F) of petitioners' returns for 1958 through 1960 showed the following: 195819591960Farm Income$ 416.90 $522.11 Less: Farm Ex-pense$ 503.391,374.132,575.19Depreciation920.002,684.002,622.00Net Loss($1,423.39)($3,641.23)($4,675.08)91 In the statutory notice of deficiency the respondent determined that a portion of the deductions claimed by petitioner in Schedule F as farm expenses and depreciation were attributable to petitioner's engineering business and allowed a deduction for such portion. After the allowance of the engineering expenses and depreciation, the farm losses originally claimed by petitioner were reduced to $595.95, $805.83 and $2,476.08 for the years 1958, 1959 and 1960, respectively. The remaining farm losses still in dispute consist mainly of depreciation on farm machinery and expenditures for occasional labor on the premises. Respondent disallowed these losses on the ground that petitioner failed to show that he was in the business of farming. Respondent disallowed deductions for certain insurance payments claimed by petitioner in Schedule C in 1958, 1959 and 1960 in the respective amounts of $104.25, $119 and $346.68 on the grounds that (a) they were unsubstantiated and/or (b) they were not ordinary and necessary business expenses. The amounts now remaining in dispute are $19 in 1959 and 1960, representing workmen's compensation premium, and $227.48 in92 1960, representing liability and fire insurance premiums. Respondent also determined that the gain realized by petitioner from the sale of his Lake Forest residence in 1959 was includable in taxable income for that year on the ground that the transaction did not qualify under the nonrecognition of gain provisions of section 1034. It has been stipulated that the gain realized by petitioner from the sale of his Lake Forest residence in 1959 was $4,177. Opinion The first issue is whether petitioner is entitled to deduct the Libertyville farm losses in 1958, 1959 and 1960. To prevail, petitioner must show that he operated the farm in those years as a business with a true intention of making a profit. Norton L. Smith, 9 T.C. 1150">9 T.C. 1150. Petitioner was a graduate engineer who for many years prior to 1951 was employed in an engineering capacity. In 1951 he purchased the Lake Forest residence, where he used a portion of the premises in his business as a consulting engineer. He testified that subsequently the office and shop space in his Lake Forest residence "became inadequate for93 the business I was doing." In 1958 petitioner purchased the Libertyville property, which with its house and outlying buildings and some 80 acres of land, provided the needed space. Petitioner's actions upon taking possession of the Libertyville property do not even remotely show that he was concerned with farm operations. It is true he bought land that had once been farmed and farm machinery and the land was subject to a soil conservation contract. He immediately remodeled the several farm buildings to make them suitable for his engineering purposes and equipped them with sundry types of engineering equipment. He testified that "I think I started moving it [the engineering equipment] in rather soon because I had some work on which this was being used for different customers - for a customer who required that some of it be moved in right away." Petitioner also needed space for his personal engineering projects, which included a 6-rotor helicopter he had been working on for years and a 2-rotor air cushion vehicle. He conducted several flights with the latter vehicle on the Libertyville property. Petitioner's other projects were (1) the automatic guidance of tractors and (2) experimental94 seed planting. It fairly appears from the record and the contract of purchase whereby petitioner acquired the Libertyville real property and some few items of farm machinery that this was a package deal. The former owner had one price for the realty and personal property which petitioner had to accept if he wanted to buy the realty. Petitioner's actual farming operations in these years were not impressive. Out of the 47.5 tillable acres, 37.9 acres were held in reserve under a Federal soil conservation contract. On the remaining tillable land he planted about nine acres of corn in 1959 and 1960, 2 which he did not harvest in either of the two years. Neither did petitioner harvest the hay crop on the 37.9 conservation acres in these two years. There was no livestock on the property during this period, and petitioner testified he never intended to raise or breed farm animals. Petitioner kept no regular books and records for any farming operations during the years before us, and, apart from the payments he received under the conservation contract in 1959 and 1960 in the amounts of $416.90 and $521.81, respectively, it does not appear that petitioner received any income from his farm95 operations. The soil conservation contract, which had been put on the land by a former owner, (and not renewed by petitioner) is of no significance on the issue of whether petitioner was in the farming business in the years in question. In each of the years 1961 and 1962 petitioner reported rental income of $1,200 received from an engineering company which used three of petitioner's buildings for a project which petitioner described as a "noisy operation" carried on both indoors and outdoors. Petitioner's actual farm operations resulted in losses in both of those years. Petitioner testified that in 1963 he planted a soybean crop which produced income of $1,473.94 and that other farm income (feed grain program, hay sales and certain storage payments) brought the total for 1963 to $2,665.12. Petitioner also testified that after expenses and depreciation of $1,864.50, he realized a farm profit of $800.62. Sometimes a taxpayer's activities of a business nature during years after the years in issue are some indication of96 prior entry into that business. We see nothing in petitioner's activities with respect to this land during the years 1961 and 1962, when much of the premises was rented to an engineering firm, that would indicate he was engaged in farming the land for the years 1958 through 1960. The most the testimony with respect to the later years would show would be a possible entry into the farming business in 1963. We are unable to find that petitioner intended to conduct a farming operation in the years before us with an intention of making a profit. His dominant concern in purchasing the Libertyville property was obviously to obtain a residence and to get urgently needed space to conduct his various engineering pursuits. Petitioner's expenses in connection with his engineering business activities on the property have been properly allowed. But we are convinced that the actual farm operations were insignificant in the amount of time and concern devoted to them. We do not believe that petitioner reasonably, and in good faith, sought to conduct a farming operation with any profit motive in mind. See Godfrey v. Commissioner, - F. 2d - (C.A. 6, July 29, 1964), affirming a Memorandum Opinion of97 this Court. We hold that the losses involved are not deductible as business losses under section 165. The next issue is whether petitioner is entitled to the nonrecognition of gain provisions of section 10343 in connection with the sale of his Lake Forest residence in November 1959. Respondent's first argument is that the petitioner purchased his new residence (Libertyville property) on November 8, 1958 and that the old residence in Lake Forest was sold on November 10, 1959, more than a year later, thus disqualifying such sale under the statute. 98 We are satisfied, however, that the sale of the old residence was within the statutory time limit. The closing statement for the purchase of the Libertyville property, which has been stipulated in evidence as a "true and correct" copy, shows the date of closing as November 10, 1958, and the warranty deed shows that it was filed on November 10, 1958. Respondent argues that title passed on November 8, 1958 because that is the date on which the warranty deed was notarized. In view of the other evidence, we believe that actual passage of title took place on November 10, 1958. Respondent's second argument is that petitioner has failed to qualify under the statute because he has failed to show what part of the old and new residences was used as a "principal residence" and what part was used for other purposes. Section 1.1034-1(c)(3)(ii), Income Tax Regs., provides as follows: (ii) Where part of a property is used by the taxpayer as his principal residence and part is used for other purposes, an allocation must be made to determine the application of this section. 99 If the old residence is used only partially for residential purposes, only that part of the gain allocable to the residential portion is not to be recognized under this section and only an amount allocable to the selling price of such portion need be invested in the new residence in order to have the gain allocable to such portion not recognized under this section. If the new residence is used only partially for residential purposes only so much of its cost as is allocable to the residential portion may be counted as the cost of purchasing the new residence. The regulation is a valid interpretation of the statute. In its report on the Revenue Act of 1951 the Ways and Means Committee stated as follows: Where part of a property is used by the taxpayer as his principal residence and part is used for business purposes or in the production of income (as in the case where a part of the building in which the taxpayer resides is used as a store or office or is rented or in the case of a farm property) allocation must be made to determine the extent to which the new subsection applies. If the old residence is used only partially for residential purposes, a proper allocation of the gain100 and of the selling price is necessary; only that part of the gain allocable to the residential portion may be not recognized under the new subsection and only so much of the selling price as is allocable to such part of the property need be reinvested in the new residence. If the new residence is used only partially for residential purposes, then only so much of its cost as is allocable to the residential portion is counted as reinvestment for the purpose of the new subsection. [H. Rept. No. 586, 82nd Cong., 1st Sess. 2 C.B. 357">1951-2 C.B. 357, 436.] The adjusted selling price for petitioner's old residence was about $55,000. It appears that during the years 1951 through 1959 petitioner was allowed depreciation deductions of $1,920 based upon the use of one-sixth of his old residence for business use. Consequently, the adjusted sales price to be used in making the computation under section 1034 would be reduced to about $46,000 (i.e. five-sixths of $55,000). 4Under the statute, 101 gain from the sale of the old residence is recognized "only to the extent that the taxpayer's adjusted sales price * * of the old residence exceeds the taxpayer's cost of purchasing the new residence." It is obvious from this record that the Libertyville property of some 80 acres was only partially used for residential purposes, so we must determine how much of the stipulated total cost ($87,500) can be counted as the cost of purchasing the new residence. There is in evidence an allocation of the total cost made by petitioner to (a) his residence consisting of the house and five surrounding acres, (b) equipment, business buildings and land (approximately one acre) surrounding such buildings, and (c) the remaining acreage. Petitioner allocated $34,219.12, $24,044.13 and $30,650 to the above three categories, respectively. 5Petitioner's only argument is that if we should determine that he did not operate the farm as a business for a profit then we must find that the entire Libertyville property of some 80 acres, within the exception of the buildings and acreage used102 for engineering purposes, must be regarded as his new residence for purposes of section 1034. We do not agree with petitioner's either-or argument. We do not believe that petitioner's "residence" can reasonably be said to include some 38 acres under a soil conservation contract and 27 or 28 acres of marshland and wooded area. Moreover, some of this area was used by petitioner in his helicopter experiments, which would certainly detract from its characterization as a residence. We think that the statute contemplates a meaning of residence in its ordinary and commonly understood sense. It appears from the record that petitioner himself only regarded the house itself and five acres about the house as a residence. We accept this as petitioner's new residence within the meaning of the statute. Petitioner allocated $34,219.12 to this portion of the Libertyville property, and even if this allocation were increased significantly, it would still be below the adjusted selling price of the old residence, which we have found to be about $46,000. We find, and so hold, that petitioner is not entitled to the nonrecognition of gain provisions of section 1034. The last issue involves the deductibility103 of $19 in 1959 and 1960 for workmen's compensation payments and of $227.48 in 1960 representing an allocate portion of liability and fire insurance premiums. As to workmen's compensation payments, petitioner testified it was for "[people] working on the farm, on the 80 acres." Since the farm was not operated as a business for a profit, these insurance payments cannot be regarded as ordinary and necessary business expenses under section 162. Respondent is sustained as to these items. Petitioner testified that he had three policies on the house and other buildings and property, "one fire insurance, one property, another liability." Petitioner allocated one-half of the premiums on these policies to the eight buildings used in his engineering activities and the contents in these buildings. We accept this allocation as a reasonable one. We hold that petitioner is entitled to deduct the premium of $227.48 in 1960 as an ordinary and necessary business expense. Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.↩*. Incorrect amount reported.↩2. Petitioner purchased the Libertyville property in November 1958.↩3. SEC. 1034. SALE OF EXCHANGE OF RESIDENCE. (a) Nonrecognition of Gain. - If property (in this section called "old residence") used by the taxpayer as his principal residence is sold by him after December 31, 1953, and, within a period beginning 1 year before the date of such sale and ending 1 year after such date, property (in this section called "new residence") is purchased and used by the taxpayer as his principal residence, gain (if any) from such sale shall be recognized only to the extent that the taxpayer's adjusted sales price (as defined in subsection (b)) of the old residence exceeds the taxpayer's cost of purchasing the new residence.↩4. Moreover, only that part of the stipulated gain allocable to the residential portion of the old residence can qualify for nonrecognition under the statute and the regulations thereunder.↩5. These amounts total $88,913.25, which appears to include improvements and additions to the new property.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620865/	Gravois Planing Mill Company v. Commissioner. Charles A. and Florence Beckemeier v. Commissioner.Gravois Planing Mill Co. v. CommissionerDocket Nos. 67450, 67451.United States Tax CourtT.C. Memo 1960-122; 1960 Tax Ct. Memo LEXIS 166; 19 T.C.M. (CCH) 639; T.C.M. (RIA) 60122; June 9, 1960166 Held, that no portion of amounts paid by the corporation to attorneys as reimbursements and fees for services in connection with a recapitalization and partial liquidation of the corporation, or an amount paid for a certificate of title, have been shown to be deductible as ordinary and necessary business expenses of the corporation. Standard Linen Service, Inc., 33 T.C. 1">33 T.C. 1. Held, further, that the petitioner Beckemeier first acquired ownership of property distributed to him in the partial liquidation on March 2, 1954, and that he is not entitled to a depreciation deduction on such property for the first two months of 1954. Held, further, that in computing the gain of the petitioner Beckemeier upon the redemption of his stock in the corporation, a paid-up life insurance policy received by him from the corporation is to be included at its fair market value as determined by the respondent, rather than at its cash surrender value. Robert H. Batts, Esq., for the petitioners. Robert A. Roberts, Esq., for the respondent. ATKINSMemorandum Findings of Fact and Opinion ATKINS, Judge: The respondent determined deficiencies in income tax for the taxable year 1954 as follows: DocketDeficiency inNo.PetitionerIncome Tax67450Gravois Planing Mill Com-pany$1,410.7967451Charles A. and FlorenceBeckemeier1,410.89The 167 issue as to the corporate petitioner is whether it is entitled to deduct legal fees and title expense of $2,510.05 and $203, respectively, as ordinary and necessary business expenses. The issues as to the individual petitioner Charles A. Beckemeier are (1) the proper value, to be used in computing gain or loss, for a paid-up life insurance policy received by him from the corporation as part payment for his stock, and (2) whether he in January and February 1954 had such an interest in buildings received in part payment for his stock as entitles him to depreciation deductions for those months. Findings of Fact Some of the facts are stipulated and are incorporated herein by this reference. The petitioner Gravois Planing Mill Company, hereinafter referred to as the corporation, was organized under the laws of the State of Missouri on June 13, 1893, with its principal place of business in St. Louis, Missouri. It filed its Federal income tax return for the calendar year 1954 with the district director of internal revenue, St. Louis, Missouri. The petitioners, Charles A. and Florence Beckemeier, were husband and wife and resided in St. Louis County, Missouri, during the taxable year 1954. 168 They filed a joint Federal income tax return for the calendar year 1954 with the district director of internal revenue, St. Louis, Missouri. The petitioner Charles A. Beckemeier, hereinafter sometimes referred to as Beckemeier, was born September 13, 1886. He was a stockholder and officer of the corporation during the year 1953 and for many years prior thereto, having first acquired stock thereof in 1913. He was its president during the year 1953. During the years 1945 to 1953, inclusive, and as of January 1, 1954, the corporation's issued and outstanding stock was owned as follows: SharesCharles A. Beckemeier200Hobart C. Diringer75M. R. Landgraf50R. C. Goetting75Total400In 1945 the corporation and its stockholders entered into an agreement with respect to the sale by any of the stockholders of their stock. Such agreement was renewed and amended from time to time, but essentially the same provisions prevailed at all times until and including the year in question. The agreement recited the desire of the stockholders to provide against the stock falling into the hands of others inimical to the interest of the corporation and the existing stockholders and provided, therefore, that no 169 stockholder should sell his stock without first giving the corporation the opportunity to purchase it. A stockholder desiring to sell his stock was required to give written notice to the then secretary of the corporation and the corporation had 15 days within which to accept or reject the offer to sell. It was provided that annually, within 90 days after the close of any fiscal year of the corporation, the corporation and the stockholders should fix a price for the stock, to be effective throughout the ensuing fiscal period. No formula for fixing the price was provided in the agreement. In the event of the acceptance by the corporation of any offer to sell, the price to be paid was to be the price so fixed, adjusted, however, as of the close of the month next preceding the date of the notice of intention to sell, by taking into account the net earnings or losses and the dividends If for any year a price was not so fixed, it was provided that the last preceding price so fixed should prevail. The corporation was required to pay the price to the stockholder in cash within 90 days after the date of receipt of the offer to sell, and it was provided that the stock should be transferred on 170 the books of the corporation at the time of payment. If the corporation should fail to accept the offer it was required that the stock be offered to the remaining stockholders. In the event of the death of a stockholder the corporation was required to purchase the stock of the deceased stockholder within 90 days after death. For the purposes of such agreement, the price was fixed by the stockholders for each of the years 1945 through 1952, the last price disclosed by the record having been fixed on February 14, 1952, at $1,000 per share, except that in the event of the death of Beckemeier the price for his stock should be $900 per share. In September 1953, Beckemeier orally advised Diringer, secretary of the corporation, that he desired to sell his stock and retire from the business, and told Diringer that he would sell his stock for $1,000 net per share. Thereafter on several occasions Beckemeier discussed the sale of his stock to the corporation with the other individual stockholders and officers. It was also contemplated that some of his stock might be sold to another stockholder, Landgraf, in order that Landgraf might have the same number of shares as the other stockholders, Diringer 171 and Goetting. At some time prior to December 31, 1953, the other stockholders informally agreed to payment by the corporation to Beckemeier of $1,000 net per share for his stock, and that the stock would be transferred to the corporation on December 31, 1953 or January 1, 1954. The net price of $1,000 per share was based upon the last price established pursuant to the 1945 agreement, or was determined in approximately the same way, except that no adjustment was made for the profit or loss of the corporation for the year 1953. However, the corporation did not have sufficient cash available to pay for the stock, and discussions were had as to how payment would be made. Prior to December 31, 1953, Beckemeier advised the other stockholders that he would accept the land and buildings owned by the corporation in part payment for his shares, the remainder to be paid in cash, and the stockholders agreed to this. The corporation was the owner and beneficiary of a fully paid up life insurance policy in the amount of $25,000 on the life of Beckemeier, and the stockholders and officers had intended to surrender the policy and use the cash proceeds to pay Beckemeier. However, Beckemeier offered 172 to take an assignment of the policy in lieu of cash to the extent of the cash surrender value, and suggested writing to the insurance company to ascertain such cash surrender value. The other stockholders agreed. As of January 1, 1954, the value of the land and buildings had not been definitely agreed upon, although the buildings were valued tentatively at $95,000, and the cash surrender value of the insurance policy had not been ascertained. An understanding had been reached that Beckemeier would be removed from the payroll of the corporation at December 31, 1953, and thereafter he received no further salary or compensation from the corporation. On January 2, 1954, Beckemeier sold 25 shares of his stock to Landgraf for $1,000 per share. A regular meeting of the stockholders of the corporation was held on January 11, 1954. Minutes of the meeting, as revised, recite that Beckemeier was a stockholder, and contain the following: "The Chairman stated * * that he desired to bring to the attention of the stockholders a matter which had been informally discussed by C.A. Beckemeier with the other stockholders, and asked Mr. Beckemeier to explain this matter to the meeting. * * * He [Beckemeier] 173 stated that he desired to offer to the company for liquidation, redemption and cancellation the 175 shares of stock that he still owned in the company, and that while he realized that the company was not in a position financially to distribute to him his entire distributive share in cash, he was willing to accept a distribution of assets of the company, partly in kind and partly in cash, as his distributive share on account of the stock owned by him. He further stated that he was willing to accept for his 175 shares as of January 1, 1954, the real estate of the company, land and building, but exclusive of its machinery, equipment, furniture and fixtures, and other similar assets, which he advised has a fair market value today of $115,200.00, the life insurance policy which the company carried on his life, which he was advised had a fair market value of January 1, 1954, of $17,915.73, together with the sum of $41,884.27 in cash. He explained that his offer to accept the real estate is conditioned that the company lease said property from him for a term of ten years on a basis which would assure him after allowing for depreciation over a ten-year term, a net annual average return of 174 5% on his investment if he retained the property for the full term * * . * "BE IT RESOLVED, that the offer of C.A. Beckemeier to retire from the business and deliver his remaining 175 shares of stock in the corporation to the corporation for redemption, liquidation and cancellation be accepted, and * ." The minutes of a special meeting of the stockholders of the corporation held January 11, 1954, state that it was resolved that the capital stock of the corporation should be decreased from 400 shares, par value $100 each, to 225 shares, par value $100 each. On January 25, 1954, an independent appraiser made an appraisal of the land and buildings of the corporation which showed a total value of $144,141 (land $22,975 and improvements $121,166). On the same day, upon being advised of certain defects in the plant wall, the appraiser revised his appraisal to show a total value of $103,716 (land $18,950 and improvements $84,766). At some time after receiving these appraisals the corporation and Beckemeier agreed that the buildings were to be applied toward payment for the stock at a figure of $96,000, rather than $95,000 as had been previously tentatively agreed upon. On January 27, 175 1954, the insurance company by letter advised the corporation that the cash value of the insurance policy as of December 28, 1953, was $17,805.75, and that the value of the accumulated dividends was $109.98, a total of $17,915.73. Thereafter the corporation and Beckemeier agreed that the policy was to be applied at that figure toward payment for Beckemeier's stock. The board of directors of the corporation held a special meeting on March 2, 1954. The minutes of this meeting recite that the president, Diringer, stated that "all the details had now been worked out so that it was now possible for the company to accept the offer of C. A. Beckemeier for the liquidation, redemption, cancellation and retirement of the 175 shares" and that "he recommended that the Board take appropriate action to authorize the liquidation of said shares, transfer the real estate to C. A. Beckemeier, transfer the insurance policy on his life to him, and pay the balance in cash upon receiving his 175 shares for liquidation * * ." At such meeting, the directors resolved that Beckemeier's offer be accepted, that the officers execute and deliver, as of January 1, 1954, a deed to the real estate to Beckemeier; 176 that they assign the life insurance policy to Beckemeier "at its value on January 1, 1954;" that they pay Beckemeier the amount of $41,884.27 in cash; that the 175 shares be retired to reduce the capital stock of the company; that the company enter into a lease with Beckemeier for the land and buildings; and that the corporation borrow $15,000 each from Diringer, Goetting, and Landgraf, in order to provide working funds. On March 2, 1954, Beckemeier transferred his 175 shares of stock to the corporation, and the stock records show that these shares were redeemed and cancelled on that date. On March 3, 1954, amendments to the corporation's articles of incorporation were filed with the Secretary of State of Missouri, reducing the capital stock of the corporation from 400 shares, par value of $100 each, to 225 shares, par value $100 each. On March 2, 1954, the corporation by its president, Diringer, executed a general warranty deed conveying the land and buildings to Beckemeier. The deed recited that it was made and entered into as of January 1, 1954. On March 18, 1954, the corporation asigned the insurance policy to Beckemeier. Thereafter Beckemeier as lessor and the corporation as lessee 177 entered into a lease of the land and buildings "as of the 1st day of January 1954" for a term of 10 years commencing January 1, 1954, at a monthly rental of $1,081.67. It was provided that the lessee should have the right and option at the end of the 10-year term to request the lessor to remove the improvements and construct a one-story plant or to convert the existing improvements into a one-story plant, and that if this were done the lessee should have the right to have the lease extended for a further term of 10 years. In the event the lessor should fail or refuse to make or convert such improvements and thus extend the term of the lease, then the lessee should have the right and option to purchase the property for $19,200 in cash. It has been stipulated that in 1954 Beckemeier received from the corporation for his 175 shares of stock cash in the amount of $41,884.27; land of a value of $19,200; buildings of a value of $96,000; and the insurance policy, the value of which is in dispute. At some time in the latter part of 1953 Beckemeier discussed his proposed retirement from the corporation with Charles Long, an attorney, but apparently Long gave no advice or services at that time. 178 Thereafter the corporation engaged the services of the law firm of Rassieur, Long and Yawitz in connection with the above transaction. On June 15, 1954, the law firm submitted a bill for $2,500 for services rendered and $10.05 for reimbursement of expenditures, namely, $7.80 for filing and recording certificate of amendment to the articles of incorporation and $2.25 for recording the warranty deed. The statement of services is in detail and shows that services were rendered over the period January 4 to March 2, 1954. The services rendered included attendance at numerous conferences; researching the law in regard to liquidation and redemption of the stock; preparing, reviewing, and revising minutes of meetings; advising both the corporation and Beckemeier of the legal and tax consequences of the transaction; preparing waivers of minutes; preparing a certificate of amendment to the articles of incorporation; preparing the lease; and preparing the general warranty deed. The customary charge of this law firm for the mere mechanical steps involved in a recapitalization ranges from $150 to $250, this involving only a few hours' time. The total legal fees were paid by the corporation pursuant 179 to its understanding with Beckemeier that he would receive $1,000 net per share for his stock. On or about April 2, 1954, the corporation paid $203 to a title insurance company for a certificate of title for Beckemeier relating to the land and buildings in question. This fee was also paid by the corporation pursuant to the understanding that Beckemeier would receive $1,000 net per share for his stock. The corporation was not overcapitalized in 1953, and there was no plan to reduce the size of the business of the corporation. At the time of the hearing Beckemeier continued to own the insurance policy, his wife Florence being the beneficiary. The corporation paid Beckemeier rental for the properties commencing January 1, 1954. In its income tax returns the corporation took no depreciation on the buildings after December 31, 1953. In 1953 it had taken depreciation in the amount of $1,091.21. In its income tax return for the taxable year 1954, the corporation claimed the amount of $2,713.05 as ordinary and necessary business expenses, representing the amounts paid to the law firm and for the certificate of title above referred to. In the notice of deficiency the respondent disallowed the 180 claimed deduction on the ground that it did not represent ordinary and necessary expenses of carrying on the corporation's business. In their joint income tax return for the taxable year 1954, the individual petitioners claimed depreciation on the above-referred-to buildings in the amount of $9,600, which was depreciation for the entire year based on a 10-year life. In the notice of deficiency, the respondent disallowed 1/6 thereof, or $1,600, with the following explanation: "In your return you deducted $9,600.00 as depreciation sustained for a full year on the building located at 3026 Juniata Street, St. Louis, Missouri. Depreciation is allowable, however, for only ten months of 1954 since you did not acquire the property until March 2, 1954. Therefore, $1,600.00 (1/6) of the deduction claimed is being disallowed." In their return for 1954 the individual petitioners reported long-term capital gain of $108,200 from the disposition of Beckemeier's 200 shares of stock of the corporation (the 25 shares sold to Landgraf and the 175 shares transferred to the corporation). In such return it was represented that the stock was disposed of on March 1, 1954, that the cost was $91,800, and the 181 selling price was $200,000. In the notice of deficiency the respondent increased the long-term capital gain reported with the following explanation: "It is held that the fully paid up life insurance policy on your life which you received in 1954 as part of the consideration for your surrender of 175 shares of capital stock of the Gravois Planing Mill Company, which you valued at $17,915.73 in computing the long term capital gain reported in your return, actually had a fair market value of $21,639.25 at the time of the transaction. Your taxable income, therefore, is increased by the amount of $1,861.76, representing 50 percent of the increase of $3,723.52 in the amount reported as the fair market value of the policy." Opinion With respect to the corporate petitioner the question presented is whether it is entitled to deduct as ordinary and necessary business expense any part of the amount of $2,713.05 which it expended for attorney's fees and reimbursements and for a certificate of title for Beckemeier covering the property which he received from the corporation. The corporation contends that some portion of these expenditures was made in connection with a distribution in partial liquidation 182 and is therefore deductible, relying upon our prior opinions in Mills Estate, Inc. 17 T.C. 910">17 T.C. 910, reversed in part (C.A. 2) 206 F. 2d 244, and Tobacco Products Export Corporation, 18 T.C. 1100">18 T.C. 1100. The facts are set forth in detail in our Findings of Fact. These show that at its inception the plan was for Beckemeier to sell his stock to the corporation pursuant to the existing contract among the stockholders and the corporation. However, later, and before the transfer of the stock to the corporation and the transfers of the properties to Beckemeier were effected, the corporation adopted resolutions couched in terms of a partial liquidation and which provided for the retirement and cancellation of Beckemeier's stock and the filing of amendments to the articles of incorporation to reflect a reduction in the corporation's capitalization.1 All of Beckemeier's stock was acquired and canceled and the certificate of incorporation was amended. The transaction, as ultimately consummated, literally meets the definition of a partial liquidation contained in section 115(i) of the Internal Revenue Code of 1939. 2184 See Lucius Pitkin, Inc., 13 T.C. 547">13 T.C. 547. As stated, the petitioner contends that there 183 was a partial liquidation, and the respondent on brief does not argue that there was not. He makes no point of the fact that there was a lease back of part of the property to the corporation, or that there was no contraction of the business of the corporation. We conclude that there was a partial liquidation of the corporation under section 115(i) of the 1939 Code and the judicial authorities thereunder. Nevertheless, the respondent's position is that none of the expenditures in question constituted ordinary and necessary expenses of carrying on the business of the corporation, but, rather were capital expenditures made in connection with the corporation's acquisition of part of its own shares of stock and for amendment to its articles of incorporation to reflect the redemption of such stock. He refers to the opinion of the Court of Appeals for the Second Circuit which reversed in part Mills Estate, Inc., supra. He also argues that some of the legal fees and the cost of the certificate of title were in reality expenditures for the benefit of Beckemeier which the corporation paid and that, as such, they must necessarily be considered as a part of the cost to the corporation of the stock which the corporation acquired from him. In Mills Estate, Inc., supra, and in Tobacco Products Export Corporation, supra, we took the position that the portion of expenditures 185 incurred in connection with a partial liquidation and recapitalization which relates to the recapitalization are non-deductible capital expenditures, but that the portion which relates to the distribution of assets constitutes deductible ordinary and necessary business expense of the corporation. In that case, although there was no basis for a precise allocation, we allocated a portion of the total expenditures to the distribution in partial liquidation, referring to Cohan v. Commissioner ( C.A. 2) 39 F.2d 540">39 F. 2d 540. A similar allocation was made in Tobacco Products Export Corporation, supra.In its opinion in Mills Estate v. Commissioner, supra, the Court of Appeals stated that it found it unnecessary to there decide the question whether any expenditures made in connection with a partial liquidation are deductible as a business expense. It took the position that what occurred in that case was a change in the corporate structure for the benefit of future operations, that the costs of that sort of corporate change are not deductible as ordinary and necessary expenses in carrying on a trade or business, that the services for which the attorneys were paid were all necessary steps to accomplish 186 the change of corporate structure, and that such services should not be split into parts and viewed separately to determine the deductibility of the cost of each part as though neither had any connection with the other. It thus in effect held that in such a situation its own prior decision in Cohan v. Commissioner, supra, does not justify or require an allocation of any portion of the expenditures to the distribution in partial liquidation. Subsequently, in Standard Linen Service, Inc., 33 T.C. 1">33 T.C. 1, we held that the taxpayer was not entitled to deduct as ordinary and necessary expenses any portion of certain miscellaneous expenditures in connection with the transfer of its assets in partial liquidation, the amendment of its corporate charter, and the redemption and cancellation of its stock, on the ground that the taxpayer had failed to show that no part of these expenditures represented the cost of a capital item. We also there refused to allow the deduction of legal fees incurred upon the complete liquidation of a corporation, since the liquidating corporation had not established that the fees were paid on its own behalf rather than on behalf of its stockholder. We see no essential 187 difference between the instant case and Standard Linen Service, supra. The detailed statement of the services rendered by the attorneys here indicates that in the main the services were necessary steps in the redemption and cancellation of the stock of Beckemeier and the recapitalization of the corporation. On brief the petitioner places stress on the fact that one of the attorneys representing the corporation in the partial liquidation testified that the customary charge of his firm for the mere mechanical steps involved in a recapitalization ranges from $150 to $250. However there is much more to a recapitalization than the mere mechanical steps. In addition, it may be pointed out that some of the fees were paid for legal services rendered to Beckemeier. Only one item of service might be considered as relating particularly to the actual transfer of assets of the corporation in partial liquidation, namely, the service in preparing the warranty deed to Beckemeier. However, this item would appear to be a relatively insignificant part of the whole services rendered by the attorneys. Also, some of the expenditures, other than legal fees, appear to have been made on behalf of Beckemeier. 188 Unless these circumstances we conclude that the corporation has failed to prove that any portion of the claimed amount constituted ordinary and necessary expenses of its business, and we therefore approve the respondent's disallowance of the claimed deduction. Turning to the issues with respect to the individual petitioner Beckemeier, we will first consider the amount of the depreciation deduction to which he is entitled. The parties are agreed that the depreciable cost to Beckemeier of the buildings was $96,000. Beckemeier in his return for 1954 claimed a depreciation deduction of $9,600, being depreciation for the full year based on a useful life of the property of 10 years. The respondent, taking the position that the petitioner did not acquire the property until March 2, 1954, disallowed depreciation claimed for the first two months of 1954 in the amount of $1,600. The over-all transaction was not completed by January 1, 1954. There remained final decisions to be made as to the value or price at which both the real property and the insurance policy would be transferred. It was not until late in January 1954 that these matters were settled. Furthermore, the exact character of the 189 over-all transaction had not been determined, as indicated in our discussion of the first issue hereinabove. Negotiations continued on well into 1954, and further stockholders' and directors' meetings were necessary. The minutes of the stockholders' and directors' meetings held on January 11 and March 2, 1954, refer to discussions had among the parties prior to January 1954, as only informal discussions. It was not until March 2, 1954, after all elements of the transaction had been settled that Beckemeier transferred his stock to the corporation and received a deed to the property in question. Under these circumstances we think it is clear that not until March 2, 1954, when Beckemeier received the deed, did he have any legal or equitable interest in the buildings. Although prior to January 1, 1954, a tentative oral agreement had been reached to transfer the stock from Beckemeier to the corporation and there had been discussions concerning the transfer of property of the corporation to Beckemeier, it cannot be said that a transfer of any interest in the realty had been effected, or that there was even a legally enforceable contract to transfer the realty. It is our conclusion that the 190 petitioner is not entitled to depreciation on the buildings for the months of January and February 1954. On brief the petitioner Beckemeier argues that if he is not entitled to depreciation for the first two months of 1954, "then the life of the building under the terms of the Lease between Gravois Planing Mill Company and Charles A. Beckemeier would be but 9 years and 10 months, in which event the rate of depreciation would be $813.56 per month as opposed to $800 per month," and states that thus the respondent made a mathematical error. This position presupposes that the respondent has determined that the useful life of the property is limited by the lease. However, the deficiency notice does not so state and we cannot assume that the respondent's determination in the notice of deficiency represented merely a mathematical error. The net effect of the respondent's determination was to allow depreciation over a useful life of 10 years from March 2, 1954. On brief the respondent, in effect, denies that his determination was merely a mathematical error, stating that the asset of a lessor is depreciated over the life of the asset rather than the term of a lease. We need not here decide 191 whether an unconditional agreement to retransfer property at a specified time might be considered as limiting the useful life of property for purposes of the depreciation deduction. Suffice it to say that the provisions in the lease here involved do not establish that Beckemeier's investment in the buildings will be lost at the end of the 10-year term stated in the lease. Beckemeier could defeat the lessee's option to repurchase by making improvements to the buildings and extending the lease for a further term. This does not constitute proof that the buildings will be obsolete at the end of the 10-year term as provided in the lease. Nor is there any other evidence as to the useful life of the property. Under the circumstances, we must approve the respondent's determination with respect to Beckemeier's depreciation deduction for the year 1954. On brief the petitioners state that there is an inconsistency on the part of the respondent in disallowing to Beckemeier the depreciation for the first two months of 1954 and at the same time failing to make an adjustment of the corporation's tax liability to permit it to take depreciation for such two months. However, the corporation did not 192 claim depreciation for the two months and has not raised the issue in its pleadings. Furthermore, there is no evidence, such as cost, estimated life, and depreciation previously taken, upon which we could determine whether and to what extent the corporation would be entitled to depreciation on the property for such two-month period. The final issue is whether the respondent erred, in determining the gain derived by Beckemeier upon the redemption of his 175 shares of stock, by including the paid-up life insurance policy at a fair market value of $21,639.25, rather than using the cash surrender value of the policy, $17,915.73. We have held hereinabove that the transfer of the property, including the insurance policy, from the corporation to Beckemeier was in partial liquidation of the corporation within the meaning of section 115(i) of the Internal Revenue Code of 1939. Section 115 (c) of the Code provides that an amount distributed in partial liquidation of a corporation shall be treated as payment in exchange for the stock and that the gain shall be determined under section 111. Section 111 of such Code (as well as its counterpart, section 1001 of the Internal Revenue Code of 1954), 193 provides that the gain from the sale or other disposition of the property shall be the excess of the amount realized therefrom over the adjusted basis of the property and that the amount realized shall be the sum of any money received plus the fair market value of the property (other than money) received. The parties have stipulated that Beckemeier received cash in the amount of $41,884.27 and land and buildings of a total value of $115,200. This leaves in question only the amount to be included in the computation as the fair market value of the insurance policy. On brief Beckemeier stresses the well established rule that the fair market value of property is the price a willing buyer would pay a willing seller therefor, neither being under any compulsion. He argues that he and the officers of the corporation dealt at arm's length in determining that the stock which would be liquidated had a fair market value of $1,000 per share. He points out that he sold 25 shares to another stockholder at that price. He further argues that while still dealing at arm's length he and the corporation determined the values of the assets which were to be used in making up the $175,000 total liquidation 194 price, pointing out that it had originally been planned that the policy would be surrendered by the company to the insurance company for its cash surrender value and that the cash so obtained would be used in partial payment for the stock. As pointed out above, in a partial liquidation we are concerned with the fair market value of the assets received. The cases cited by the petitioner which do not involve partial liquidations are not in point. The fact that Beckemeier and the corporation agreed to the transfer of the insurance policy at its cash surrender value for purposes of satisfying an agreed price of $1,000 per share is not necessarily determinative of the actual fair market value of the policy. The parties did not bargain to establish the fair market value of the policy. Diringer, secretary of the corporation, testified that he was not aware that the policy had value other than the cash surrender value. In Charles Cutler Parsons, 16 T.C. 256">16 T.C. 256, we held that where the taxpayer transferred certain life insurance policies to the insurance company in exchange for other policies, including a single premium life insurance policy, the single premium life insurance policy received is 195 to be included in the computation of the gain at its fair market value, which is greater than the cash surrender value. In that case we stated in part as follows: "Since the only value realizable at any time prior to petitioner's death was and will be the cash surrender value, the petitioner urges that this would represent the fair market value of the new policy. We do not agree. "The cash surrender value of a life insurance policy is the amount that will be paid to the insured upon surrender of the policy for cancellation. It is merely the money which the company will pay to be released from its contract. * "The cash surrender value is the market value only of a surrendered policy and to maintain that it represents the true value of the policy is to confuse its forced liquidation value at an arbitrary figure with the amount realizable in an assumed market where such policies are frequently bought and sold. Moreover, such an argument overlooks the value to be placed upon the investment in the insured's life expectancy and the protection afforded his dependents. "The rule is, then, that the fair market value of a single premium life insurance policy for the purpose of determining 196 taxable gain derived from exchange of insurance policies is the same price that any person of the same age, sex, and condition of health as the insured, would have to pay for a life policy with the same insurance company on the date the exchange took place. 'This is a reasonable standard and one agreed upon by a willing buyer and a willing seller both of whom are acting without compulsion.' Cf. Ryerson v. United States, (N.D. Ill., 1939) 28 Fed. Supp. 265, 267, affd. (1941) 312 U.S. 260">312 U.S. 260." See also Guggenheim v. Rasquin, 312 U.S. 254">312 U.S. 254 wherein the Supreme Court held that surrender of a single premium life insurance policy is only one of the rights of the owner, and rejected the taxpayer's contention that the cash surrender value represents the value of the policy for gift tax purposes. Although the policy involved in the instant case is not a single premium policy, it had been fully paid up and we see no difference in principle between it and a single premium policy. Beckemeier in receiving this fully paid $25,000 life insurance policy received valuable rights other than merely the right to surrender the policy for cash. Clearly it was worth more to Beckemeier than its cash surrender *197 value. The respondent has determined that the fair market value of the policy was $21,639.25. There is no evidence in the record to show error in this determination, and we accordingly approve the respondent's inclusion of the policy in the computation of gain at that figure. Decisions will be entered for the respondent. Footnotes1. This was done pursuant to the requirements of the statutes of Missouri. See sections 351.390 and 351.195 Vernon's Annotated Missouri Statutes and annotations, including Botz v. Helvering ( C.A. 8) 134 F. 2d 538↩. 2. e taxable year here involved is 1954. However, section 391 and section 392 of the Internal Revenue Code of 1954 provide that part I and part II of subchapter C, which relate to distributions in redemption of stock and to partial liquidations, are not effective until June 22, 1954. Under section 395 of the 1954 Code, in considering whether the transaction was a partial liquidation, we are concerned with section 115(i) of the Internal Revenue Code of 1939, which provides as follows: (i) Definition of Partial Liquidation. - As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620866/	Hazel H. Potter v. Commissioner.Potter v. CommissionerDocket No. 94700.United States Tax CourtT.C. Memo 1963-28; 1963 Tax Ct. Memo LEXIS 317; 22 T.C.M. (CCH) 110; T.C.M. (RIA) 63028; January 30, 1963Hazel H. Potter, pro se, 4866 Bedford Ave., Detroit, Mich. Ralph A. Anderskow, Esq., for the respondent. DAWSONMemorandum Opinion DAWSON, Judge: Respondent determined a deficiency in the petitioner's income tax for 1957 in the amount of $373.10. The only question for decision is whether certain amounts paid to the petitioner in 1957 by her former husband are includable in her gross income under section 71(a), Internal Revenue Code of 1954, or whether they318 represent payments solely for the support of two minor children and, therefore, nontaxable under section 71(b). All of the facts were stipulated and are so found. The stipulation of facts is incorporated herein by reference. Hazel H. Potter, the petitioner herein, resides at 4866 Bedford Avenue, Detroit, Michigan. She filed her Federal income tax return for the calendar year 1957 with the district director of internal revenue at Detroit, Michigan. Hazel was formerly married to Richard W. Potter. They have three children, Richard, Jr., John and William, who were born in 1937, 1949 and 1955, respectively. Hazel and Richard separated. On November 7, 1956, pursuant to a divorce proceeding, the Circuit Court for Wayne County, Michigan, entered an Order for Temporary Support, Attorney Fees, etc., which provided, in part, that - * * the plaintiff, RICHARD POTTER, shall pay to the Friend of the Court for the County of Wayne, for the support and maintenance of the minor children of the parties and the defendant, the sum of ONE HUNDRED ($100.00) DOLLARS on the 26th day of October, 1956, and a like sum in advance each and every week thereafter, until the further Order of this Court; 319 Pursuant to the Order for Temporary Support, Richard made periodic payments in 1957 to Hazel through the Friend of the Court in the total amount of $5,200 for the support and maintenance of the minor children and his wife. Payments which were due on December 21, 1956 and December 28, 1956, aggregating $200, were received by Hazel on January 10, 1957. Payments which were due from January 4, 1957, through December 13, 1957, totaling $5,000, were received by Hazel at various times in 1957. Records of the Friend of the Court show that $5,200 was paid through that office to Hazel during the year 1957. On December 24, 1957, Hazel and Richard signed a Property Settlement Agreement which contained, inter alia, the following provisions: Plaintiff husband shall pay the sum of Twenty-Five ($25.00) Dollars each for the support of the two (2) youngest minor children until they reach the age of eighteen (18) years and until the further order of this Court. * Plaintiff shall pay the sum of Twenty-Five ($25.00) Dollars per week for the support and maintenance of RICHARD POTTER, son of the parties hereto until said minor graduates from college or until June of 1961, whichever occurs320 first. A Final Decree of Divorce was entered on January 10, 1958, by the Circuit Court of Wayne County. The decree incorporated the provisions of the Property Settlement Agreement and provided, in part, as follows: IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the Cross-Defendant, RICHARD POTTER, will pay to the Friend of the Court for the County of Wayne, for the support and maintenance of JOHN POTTER and WILLIAM POTTER, the minor children of the parties hereto, the sum of Twenty-Five ($25.00) Dollars each on the date of the entry of this Decree and a like sum for each of said minor children each and every week thereafter, until said children reach the age of eighteen (18) years and until the further order of this Court. IT IS FURTHER ORDERED, ADJUDGED AND DECREED that Cross-Defendant shall pay to the Friend of the Court for the County of Wayne, beginning on the date hereof, the sum of Twenty-Five ($25.00) Dollars for the maintenance of the minor son, RICHARD POTTER, and a like sum each and every week thereafter until said, RICHARD POTTER, leaves or graduates from college or until June of 1961, whichever happens first. In her income tax return for 1957 Hazel reported only321 $2,600 of the $5,200 received through the Friend of the Court and deducted $465 for half of the mortgage payments on the home owned jointly by her and Richard, Sr. The respondent determined in his notice of deficiency that Hazel should have included the entire $5,200 in her gross income for 1957; he disallowed the deduction of $465 claimed as payments on the house; and he increased the exemptions from $1,200, as shown on the tax return, to $2,400. The respondent has agreed and stipulated that the total amount of $930, representing the 12 monthly mortgage payments of $77.50 on the home which were included in the $5,200 received by Hazel, is not taxable to her. And Hazel has agreed and stipulated that interest in the amount of $384.86, which was included in the $930, is not allowable as an itemized deduction on her 1957 income tax return. If the terms of the Order for Temporary Support had not been later changed by the Property Settlement Agreement, the amounts paid to the petitioner in 1957 clearly would be included in her gross income under section 71(a), Internal Revenue Code of 1954, and would not come within the provisions of section 71(b). 1 To the extent322 that a decree, instrument or agreement specifically indicates the proportion or dollar amount for the support of minor children, such amounts are not taxable to the wife. But if the decree, instrument or agreement does not "specifically designate" or "fix" the amount or portion of the payment which is to go to the support of the children, the whole sum is included in the wife's income. Commissioner v. Lester, 366 U.S. 299">366 U.S. 299 (1961). While this Court had attempted to give a less rigid interpretation to the provisions of the statute, the Supreme Court ruled otherwise and made it plain that section 71(b) is not to be given an expansive construction.323 Here the Order for Temporary Support imposed upon Richard the obligation of making periodic payments to Hazel "for the support and maintenance of the minor children of the parties and the defendant" without further specifications as to the amount intended for their sons, William and John. Consequently, any payments made pursuant to such provision of the Order for Temporary Support would not be covered by section 71(b). The petitioner contends, however, that since the Property Settlement Agreement, which did fix definite amounts for the support of all three children, was signed during the taxable year in question and carried out the true intent of the parties, it and not the Order for Temporary Support should control the taxability of the payments she received. Her position is that all payments throughout the year 1957 were made under the terms of the Property Settlement Agreement. The respondent, on the other hand, argues that all payments between January 1, 1957 and December 24, 1957, were made under the Order for Temporary Support because there was no retroactive intent expressed in the Property Settlement Agreement. We cannot agree with the petitioner's position. The Property324 Settlement Agreement indicated no retroactive change. The controverted payments were made pursuant to the Order for Temporary Support. It was that decree which "fixed" the tax character of the amounts paid. Such payments could not be retroactively altered by the subsequently executed Property Settlement Agreement. It matters not whether the change was made in the same taxable year. The real question is: Under what decree or agreement were the payments actually made? We think the answer is the Order for Temporary Support because that decree determined the rights of the parties until they were modified by the Property Settlement Agreement. The character of those payments made pursuant to the Order for Temporary Support was not changed by the subsequent events. Therefore, the later agreement did not serve retroactively to "fix" those amounts as payments for the support of the children. See Frances Hummel, 28 T.C. 1131">28 T.C. 1131 (1957); Michel M. Segal, 36 T.C. 148">36 T.C. 148 (1961); Dorothy Turkoglu, 36 T.C. 552">36 T.C. 552 (1961); and Joslyn v. Commissioner, 230 F. 2d 871 (C.A. 7, 1956), affirming this issue, 23 T.C. 126">23 T.C. 126 (October 28, 1954). This is not325 a case where an error was thought to exist in an earlier decree which was subsequently corrected by a nunc pro tunc order. Cf. Margaret Rice Sklar, 21 T.C. 349">21 T.C. 349 (1953); Velma B. Vargason, 22 T.C. 100">22 T.C. 100 (1954). Accordingly, we hold that the stipulated amounts Hazel received in 1957 are includable in her gross income. The petitioner is not entitled to any overpayment. In her Amendment to Petition, the petitioner alleges that she received payments in 1957 totaling only $5,000 instead of $5,200. She argues that two $100 payments due in 1956, but paid by Richard in 1957, were arrearages and should not be included in her 1957 income. Having already concluded that none of the amounts received by Hazel in 1957 were support payments, the arrearages received in 1957 must also be included in her income for that year. She was on the cash basis for periodic payments. Thus, where the husband seeks to liquidate his arrearages and pays them off in one year, it may cause a bunching of income in that year to the wife. Antoinette L. Holahan, 21 T.C. 451">21 T.C. 451 (1954), aff'd 222 F. 2d 82 (C.A. 2, 1955). To take into account concessions made by the parties326 in the stipulation of facts, Decision will be entered under Rule 50. Footnotes1. SEC. 71. ALIMONY AND SEPARATE MAINTENANCE PAYMENTS. (a) General Rule. - (1) Decree of Divorce or Separate Maintenance. - If a wife is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such decree in discharge of (or attributable to property transferred, in trust of otherwise, in discharge of) a legal obligation which, because of the marital or family relationship, is imposed on or incurred by the husband under the decree or under a written instrument incldent to such divorce or separation. (2) Written Separation Agreement. - If a wife is separated from her husband and there is a written separation agreement executed after the date of the enactment of this title, the wife's gross income includes periodic payments (whether or not made at regular intervals) received after such agreement is executed which are made under such agreement and because of the marital or family relationship (or which are attributable to property transferred, in trust or otherwise, under such agreement and because of such relationship). This paragraph shall not apply if the husband and wife make a single return jointly. (3) Decree for Support. - If a wife is separated from her husband, the wife's gross income includes periodic payments (whether or not made at regular intervals) received by her after the date of the enactment of this title from her husband under a decree entered after March 1, 1954, requiring the husband to make the payments for her support or maintenance. This paragraph shall not apply if the husband and wife make a single return jointly. (b) Payments to Support Minor Children. - Subsection (a) shall not apply to that part of any payment which the terms of the decree, instrument, or agreement fix, in terms of an amount of money or a part of the payment, as a sum which is payable for the support of minor children of the husband. For purposes of the preceding sentence, if any payment is less than the amount specified in the decree, instrument, or agreement, then so much of such payment as does not exceed the sum payable for support shall be considered a payment for such support.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620867/	Adolf Schwarcz, Petitioner, v. Commissioner of Internal Revenue, RespondentSchwarcz v. CommissionerDocket No. 48795United States Tax Court24 T.C. 733; 1955 U.S. Tax Ct. LEXIS 131; July 22, 1955, Filed 131 Decision will be entered under Rule 50. Petitioner was a Hungarian national until he became a citizen of the United States in 1948. He first came to this country in 1939 and during the years 1942, 1943, and 1944 he was a resident alien in the United States. He owned property in Hungary on June 5, 1942, when the United States declared war on Hungary. Held:1. Petitioner suffered war losses in 1942 within the meaning of section 127 of the Internal Revenue Code of 1939.2. Certain of the war losses were attributable to petitioner's business of operating apartment houses or petitioner's individual jewelry business. Respondent was in error in denying a net operating loss deduction carried forward to 1944 to the extent the war losses were attributable to the businesses.3. Certain of petitioner's war losses were not attributable to any trade or business regularly carried on by him, and respondent properly disallowed the net operating loss deduction carried forward to 1944 to the extent that it was based thereon. Isidore R. Tucker, Esq., for the petitioner.Maurice E. Stark, Esq., for the respondent. Arundell, Judge. ARUNDELL734 Respondent determined a deficiency of $ 7,953.10 in the income tax of petitioner for the fiscal year ended September 30, 1944. The petition herein alleges an overpayment for that133 year in the amount of $ 35,804.21.The principal question for decision is whether and to what extent petitioner is entitled to a net operating loss deduction in the fiscal year ended September 30, 1944, based upon war losses sustained by the petitioner in the fiscal year ended September 30, 1942, as contemplated by section 127 of the Internal Revenue Code of 1939.Certain adjustments covered by the deficiency notice and not contested by petitioner will be given effect under Rule 50.The stipulated facts are found as facts and incorporated herein by reference.FINDINGS OF FACT.Petitioner originally was a native and resident of Budapest, Hungary. In April 1939, he came to the United States with his wife and in January 1940 they decided to take up permanent residence in New York City. Petitioner became a naturalized citizen of the United States in 1948. Petitioner's wife died prior to the hearing in this cause.Petitioner filed individual income tax returns for the fiscal years ended September 30, 1942, 1943, and 1944 with the collector of internal revenue for the third district of New York.On October 6, 1931, a 3-story apartment house containing several rental apartments and rental134 stores, located at 76 Andrassy UT, Budapest, Hungary, hereinafter referred to as Andrassy, was purchased in the names of Mrs. Adolf Schwarcz and Mrs. Odon Vogel for 383,000 pengoes (Hungarian currency). On May 27, 1933, one-half of the property interest in the name of Mrs. Adolf Schwarcz was transferred to petitioner's daughter, Livia Schwarcz. The property was in existence on June 5, 1942, and on that date the Hungarian Ground Register, the official record of property ownership in Hungary during the period in question, indicated that one-fourth of the title ownership of the property was in the name of Mrs. Adolf Schwarcz. On June 5, 1942, the building had depreciated to the extent of 33 1/3 per cent.On December 31, 1938, a 4-story apartment house containing several rental apartments and rental stores located at 35 Terez Kit, Budapest, Hungary, hereinafter referred to as Terez, was purchased in the names of Mr. and Mrs. Adolf Schwarcz and Mr. and Mrs. Odon Vogel for 240,000 pengoes. On that date, petitioner and Vogel paid 16,800 pengoes for legal fees, recording fees, and other items of a capital nature. 735 Shortly after the acquisition of the Terez property, petitioner135 and Vogel paid 100,000 pengoes for a new elevator, new bathrooms, and other capital additions. The property was in existence on June 5, 1942, and on that date the Hungarian Ground Register indicated that one-half of the title ownership of the property was in the name of Mr. and Mrs. Adolf Schwarcz. As of June 5, 1942, the building had depreciated to the extent of 10 per cent.On June 22, 1940, a 3-story apartment house containing several rental apartments, rental stores, and rental warehouse space located at 3 Dob utca, Budapest, Hungary, hereinafter referred to as Dob, was purchased in the names of Mr. and Mrs. Adolf Schwarcz and Mr. and Mrs. Odon Vogel for 140,000 pengoes. The property was in existence on June 5, 1942, and on that date the Hungarian Ground Register indicated that one-half of the title ownership of the property was in the name of Mr. and Mrs. Adolf Schwarcz. As of June 5, 1942, the building had depreciated to the extent of 6 per cent.On June 5, 1942, the fair market value of each of the 3 aforementioned apartment houses was in excess of its cost. Fifty per cent of the original cost of each property was allocable to the building thereon.Until his departure 136 for the United States in 1939, petitioner was personally engaged in the management and operation of the apartment houses. Thereafter, the properties were under the management and operation of petitioner's associate, Vogel, petitioner's daughter, and her husband.The Andrassy property was owned by Mrs. Adolf Schwarcz, Mrs. Odon Vogel, and petitioner's daughter. Petitioner had no interest in that property. Petitioner's individual interest in the Terez and Dob properties was limited to a one-fourth ownership.Petitioner was regularly engaged in carrying on the business of operating the Terez and Dob properties from the time of their acquisition until June 5, 1942.During a period of 4 or 5 years before he left for the United States, petitioner was regularly engaged individually in the business of purchasing and selling gold, silver, diamonds, and antique watches. He sold his wares primarily at retail.Upon his departure for the United States petitioner closed out his jewelry business in Budapest and stored his unsold inventory in a bank vault and an office safe. The property was entrusted to the care of petitioner's son-in-law, Elek Brust, and petitioner's son, Laszlo Schwarcz, for137 safekeeping with instructions that the property was not to be sold, but was to be held awaiting petitioner's return.On June 5, 1942, petitioner's inventory in the aforementioned business consisted of the following property which was located in Budapest and had a cost basis to petitioner as shown: 736 4 kilograms of gold fashioned objects, gold debris, ingotsand miscellaneous gold items24,000 pengoes6 diamonds, totaling 20 karats60,000 pengoes2 cases, 65 kilograms of silverware each, totaling 130kilograms19,500 pengoesVarious antique gold watches2,000 pengoesWatches Trading Company, Limited, first organized in 1924, was at all times pertinent hereto a corporation with characteristics for tax purposes similar to those of a United States domestic corporation. Its business was essentially a wholesaling operation. Throughout the period here in question, petitioner and Vogel were the principal stockholders and directors. The corporation was in existence and operating on June 5, 1942.As of December 31, 1942, the books of Watches Trading Company, Limited, reflected an amount of 121,016 pengoes payable by the company to petitioner. Of that amount, 45,000138 pengoes represented accounts receivable due petitioner for watches sold in May 1938 to the corporation by petitioner in connection with the operation of his individual business.In March 1940 petitioner started a wholesale and retail jewelry business in New York City and continued to operate it through 1944.On June 5, 1942, the United States declared war on Hungary.OPINION.The basic question in this case is whether and to what extent petitioner is entitled to a net operating loss deduction for the fiscal year ended September 30, 1944.Petitioner contends that by reason of war losses sustained in the fiscal year 1942 he had a net operating loss for that year, a part of which he seeks to carry forward to his fiscal year 1944.Respondent disallowed the losses carried forward in their entirety and relies on several alternative grounds in support of his action. It is respondent's initial contention that as a matter of law, war losses within the meaning of section 127 1 of the Internal Revenue Code of 737 1939, can never be attributable to the operation of a trade or business regularly carried on and that they necessarily fall within the limitation on net operating losses set139 forth in section 122 (d) (5) 2 of the Internal Revenue Code of 1939.Respondent's reasoning, while elaborate and complex, boils down to the theory that section 127 losses should be treated in exactly the same manner for tax purposes as casualty losses within the meaning of section 23 (e) (3) 3 of the Internal Revenue Code of 1939. Respondent quotes from Regulations 111, section 29.127 (a)-1, as follows: 141 Section 127 (a) and (e) provides that the property and investments described above shall be treated as being "destroyed or seized" * , and this loss of such property rights is deemed to be sustained by reason of a casualty. * Respondent also quotes from S. Rept. No. 1631, 77th Cong., 2d Sess., where, under section 158, designated "War Losses," it was stated:It is a matter of conjecture as to what condition the property will be in at the termination of the war. Accordingly, such property is treated as lost upon the date war is declared, and, in view of the nature of this loss, it is treated in 142 the same manner as other casualty losses, that is, as a loss from the destruction or seizure of the property.Respondent argues that since the word "casualty" when used in reference to losses appears only in subsection 23 (e) (3) of the Internal Revenue Code of 1939, which subsection is limited to nonbusiness losses, Congress obviously intended that war losses should be placed in the category of nonbusiness losses without regard to whether the assets presumed to have been seized or destroyed are business assets or not.738 We are of the opinion that such an interpretation is wholly unwarranted. Obviously a war loss is a casualty loss in the sense that it is conclusively presumed to have arisen from a casualty, namely, the destruction or seizure of the property by an enemy of the United States. Where reference is made to war losses being in the nature of casualty losses, we think the intention is clearly to use the word "casualty" in that context.Section 23 (f) which deals with losses by corporations provides for the deduction of "losses sustained during the taxable year and not compensated for by insurance or otherwise." There is no question of a loss being personal to a corporation143 as is the case where losses by individuals are concerned. If a corporate asset is destroyed by fire or flood or other casualty, the loss is deductible under section 23 (f). Ticket Office Equipment Co., 20 T.C. 272">20 T. C. 272, affd. 213 F. 2d 318; Harris Hardwood Co., 8 T.C. 874">8 T. C. 874.Similarly, where an individual suffers a loss connected with his trade or business he can deduct that loss under section 23 (e) (1), even though the loss is caused by an event in the nature of a casualty, and the respondent has so ruled. See O. D. 367, 2 C. B. 58, which speaks of a net operating loss sustained on account of flood losses; I. T. 1808, II-2 C. B. 36 (fire loss); I. T. 3921, 1948-2 C. B. 32 (freeze, hurricane, or other casualty). See also the recent case of Reiner v. United States, 222 F. 2d 770, where it was held that damage to rental property as a result of bombing gave rise to a loss attributable to a trade or business and capable of being carried forward.There appears to be no justification for restricting war losses to144 property not connected with a trade or business. Clearly Congress had no such intention. Congress was aware that taxpayers would have great difficulty in determining or establishing the actual facts regarding assets in combat zones and territory occupied by enemies of the United States. The purpose of section 127 is clear. It fixes the dates on which losses are presumed to have occurred.We have held that war losses must be taken at the time they are "deemed" by section 127 to have occurred. Therefore, under the facts here present, the loss must be taken in 1942, or not at all. Abraham Albert Andriesse, 12 T.C. 907">12 T. C. 907; Ezra Shahmoon, 13 T. C. 705, affd. 185 F. 2d 384. To say that a loss of business property deemed to have occurred under section 127 may not be taken into consideration in determining net income because the property may not in fact have been destroyed would be to construe a statute designed to give relief so as to deny the very relief the statute intended.It is interesting to note that in the Revenue Act of 1951 Congress amended section 122 (d) (5) so as to permit losses to 145 be taken into consideration in full in computing the net operating loss deduction "if the losses arise from fire, storm, shipwreck, or other casualty, or from 739 theft." This language is clearly borrowed from section 23 (e) (3) and it is manifest from the committee reports that Congress intended to enlarge the coverage of section 122 so as to enable individuals to take into consideration for carry-forward and carry-back purposes not only losses attributable to a trade or business, but also losses of nonbusiness property by casualty. See H. Rept. No. 1213, 82d Cong., 1st Sess. (1951), p. 86.Respondent argues alternatively that even if war losses are of a type which may qualify as business losses, petitioner has failed to show that any of the claimed losses were in fact attributable to a trade or business regularly carried on by him within the meaning of section 122 (d) (5) of the Internal Revenue Code of 1939. As to the operation of the Terez and Dob properties, we think respondent is in error. 4146 We take it to be well settled that the operation of even a single parcel of rental realty may constitute the regular operation of a business. In Anders I. Lagreide, 23 T. C. 508, 511, we said:The first issue to be considered is whether or not the renting out in 1949, by Alice Lagreide, of a single piece of residential real estate, amounted to the operation by her of a trade or business regularly carried on. She inherited the property from her mother in 1948 and never occupied or maintained it as her own residence. Since the time of the mother's death, the property was either rented or available for renting, and was actually rented during part of 1948 and almost all of 1949.It is clear from the facts that the real estate was devoted to rental purposes, and we have repeatedly held that such use constitutes use of the property in trade or business, regardless of whether or not it is the only property so used. Leland Hazard, 7 T. C. 372 (1946). See also Quincy A. Shaw McKean, 6 T. C. 757 (1946); N. Stuart Campbell, 5 T. C. 272 (1945); John D. Fackler, 45 B. T. A. 708, 714 (1941),147 affd. (C. A. 6, 1943) 133 F. 2d 509. We add that the use of the property in trade or business was, upon the facts, an operation of the trade or business in which it was so used (see Industrial Commission v. Hammond, 77 Colo. 414">77 Colo. 414, 236 Pac. 1006, 1008). It is clear, also, that the business was "regularly" carried on, there having been no deviation, at any time, from the obviously planned use.The fact that the taxpayer operates the rental property through an agent does not prevent him from being regularly engaged in the business. Gilford v. Commissioner, 201 F. 2d 735, affirming a Memorandum Opinion of this Court. And the rule applies even though the property and the agent are in a foreign country (Austria). Reiner v. United States, supra.The record shows that petitioner actively managed the properties prior to his departure for the United States and that he was in frequent contact with his partner who managed the properties after petitioner left. We are of the opinion, accordingly, that petitioner 740 was regularly engaged in 148 the business of operating the Terez and Dob properties on June 5, 1942.As to the account receivable by petitioner from the corporation in the amount of 45,000 pengoes, we are convinced that petitioner sold certain watches of that value to the corporation and we think it clear that there is no question of a capital contribution involved as respondent suggests there may be.We think it equally clear that the loss of the account receivable was attributable to petitioner's individual jewelry business. The debt arose as a part of an ordinary business transaction wherein petitioner sold some watches to the corporation. If the corporation had refused or been unable to pay, there would have been no question but that petitioner's loss was attributable to his business. Here, petitioner's loss stems not from the corporation's inability to pay but from the presumed seizure of the corporation and its assets by an enemy power. The fact that the physical cause of a loss is extrinsic to the business does not preclude the treatment of the loss of a business asset as a business loss. Cf. O. D. 367, I. T. 1808, and I. T. 3921, supra.The fact that petitioner was no longer in the business at149 the time of the presumed seizure does not require a different result so long as the loss results from and is proximately related to the operation of the trade or business previously engaged in. Edgar L. Marston, 18 B. T. A. 558, affirmed sub nom. Burnet v. Marston, 57 F.2d 611">57 F. 2d 611; Walter G. Morley, 8 T.C. 904">8 T. C. 904.Respondent contends further, however, that if the item is deductible at all as a war loss, it is deductible under section 127 (a) (3) which deals with investments referable to destroyed or seized property rather than under section 127 (a) (2) which deals with property in enemy countries and enemy controlled areas. From that point, respondent argues that under the regulations applicable to section 127 (a) (3) petitioner is required to prove destruction of the underlying assets of the corporation.The record does not justify a conclusion that the corporation owned assets outside of Hungary, and no such question was suggested by the pleadings or in respondent's opening statement at the time of trial. As all of the assets in Hungary are deemed to have been destroyed or seized as of150 June 5, 1942, under section 127 (a) (2), it follows that the accounts receivable are deemed lost and are, therefore, deductible.As to the gold, silver, diamonds, and watches left in the office safe and bank vault for safekeeping, we think respondent is correct in his contention that any losses based thereon were not attributable to any trade or business and are, therefore, within the exclusion provided in section 122 (d) (5). The record discloses that upon his departure for the United States in 1939 petitioner ceased to operate his individual 741 jewelry business in Budapest and placed his unsold inventory in a bank vault and office safe, entrusting its safekeeping to business associates and relatives. Petitioner gave instructions that the articles were not to be sold or disposed of but were to be protected until petitioner's return. The properties were remnants of his former business which he might have disposed of or handled in various ways during the intervening years. No business reason for the delay in disposition appears. The mere fact that he allowed the property to remain in storage until the declaration of war does not relate the loss sufficiently to his former151 business to make it an operating loss of that business. The loss is too remote from, and unrelated to, the prior business to be regarded as resulting from the operation of that business.When petitioner left for the United States in April 1939, there apparently was considerable doubt in his mind as to whether he would ever return to Hungary. In early 1940, petitioner and his wife definitely resolved to remain in the United States permanently.We find no merit in petitioner's contention that the losses may be attributed to the business conducted by him in this country after March 1940.A subsidiary question is raised as to the extent of the loss attributable to the 3 parcels of real property. The Andrassy property was purchased and held in the names of the wives of Adolf Schwarcz and Odon Vogel. One-half of the interest in the name of petitioner's wife was transferred in 1933 to petitioner's daughter. It is respondent's position that petitioner has not shown that he is entitled to any loss on that property.With respect to the other 2 properties, one-half of each was listed in the Hungarian Ground Register to petitioner and his wife, the other one-half of the property being listed152 to Odon Vogel and his wife. As to those properties, respondent's view is that petitioner's loss must be limited to a one-fourth interest.We think respondent's position is well taken. The petitioner's self-serving and uncorroborated statement that the properties were his alone and not in part his wife's might be accepted, under the circumstances, if there were no contradictory evidence, but we are unwilling to accept it as better evidence of the ownership than the official records of Hungary, which show that his wife had an interest in the properties.A further question is raised as to the amount of the losses attributable to the real property. Respondent contends that the losses must be restricted to a computation based only on the stipulated cost and depreciation figures. In support of his contention, respondent characterizes the testimony of petitioner regarding amounts expended for additions, improvements, and other capital items as vague and uncorroborated. 742 While it is true that the evidence on this point is not all that might be desired, nevertheless, we are satisfied that some expenditures were made. Petitioner testified to the best of his recollection in stating153 maximum and minimum amounts between which he was certain the actual expenditures fell, and in our Findings of Fact, we have allowed only the minimum amounts testified to in each instance.The parties have stipulated the rates to be used in translating Hungarian pengoes into United States dollars. This matter is left, therefore, for the Rule 50 computation.Decision will be entered under Rule 50. Footnotes1. SEC. 127. WAR LOSSES.(a) Cases in Which Loss Deemed Sustained, and Time Deemed Sustained. -- For the purposes of this chapter -- * * * (2) Property in Enemy Countries. -- Property within any country at war with the United States, or within an area under the control of any such country on the date war with such country was declared by the United States, shall be deemed to have been destroyed or seized on the date war with such country was declared by the United States.(3) Investments Referable to Destroyed or Seized Property. -- Any interest in, or with respect to, property described in paragraph (1) or (2) (including any interest represented by a security as defined in section 23 (g) (3) or section 23 (k) (3)↩) which becomes worthless shall be considered to have been destroyed or seized (and the loss therefrom shall be considered a loss from the destruction or seizure) on the date chosen by the taxpayer which falls between the dates specified in paragraph (1), or on the date prescribed in paragraph (2), as the case may be, when the last property (described in the applicable paragraph) to which the interest relates would be deemed destroyed or seized under the applicable paragraph. This paragraph shall apply only if the interest would have become worthless if the property had been destroyed. For the purposes of this paragraph, an interest shall be deemed to have become worthless notwithstanding the fact that such interest has a value if such a value is attributable solely to the possibility of recovery of the property, compensation (other than insurance or similar indemnity) on account of its destruction or seizure, or both.2. SEC. 122. NET OPERATING LOSS DEDUCTION.(a) Definition of Net Operating Loss. -- As used in this section, the term "net operating loss" means the excess of the deductions allowed by this chapter over the gross income, with the exceptions, additions, and limitations provided in subsection (d). * * (d) Exceptions, Additions, and Limitations. -- The exceptions, additions, and limitations referred to in subsections (a), (b), and (c) shall be as follows: * * (5) Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall (in the case of a taxpayer other than a corporation) be allowed only to the extent of the amount of the gross income not derived from such trade or business.↩3. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise -- * * (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft. * *↩4. Our finding that petitioner had no interest in the Andrassy property precludes any further consideration of losses attributable thereto.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620868/	Herbert Mindell v. Commissioner.Mindell v. CommissionerDocket No. 36152.United States Tax CourtT.C. Memo 1955-17; 1955 Tax Ct. Memo LEXIS 322; 14 T.C.M. (CCH) 65; T.C.M. (RIA) 55017; January 26, 1955322 Respondent determined unreported net profits from petitioner's business for each of the taxable years 1942 through 1946. No evidence was produced on behalf of petitioner relating in any way to the amount of the deficiencies determined by respondent. 1. Held, that some part of each of the deficiencies determined by respondent was due to fraud with intent to evade tax. 2. Held, further, that petitioner failed to establish that his failure to file returns in 1945 and 1946 was due to reasonable cause and not to wilful neglect. 3. Held, further, that petitioner's contention that respondent's determinations were arbitrary and therefore invalid within the rule expressed in Helvering v. Taylor, 293 U.S. 507">293 U.S. 507, is not sustained by the record. J. Nathan Helfat, Esq., for petitioner. John J. Madden, Esq., and James J. Quinn, Esq., for respondent. FISHERMemorandum Findings of Fact and Opinion FISHER, Judge: Respondent determined deficiencies and additions to tax under sections 293(b) and 291(a) of the Internal Revenue Code of 1939 as follows: YearKind of TaxDeficiency50% Penalty25% Penalty1942Income tax$ 5,742.74$ 2,871.371943Income and victory tax16,700.838,350.421944Income tax88,066.9344,033.471945Income tax70,872.2435,436.12$17,718.061946Income tax55,026.7027,513.3513,756.68The issues involved are whether the deficiencies were due in part to fraud with intent to evade income taxes, whether delinquency penalties are due for 1945 and 1946, and whether respondent's determination of deficiencies was arbitrary and invalid. Findings of Fact Some of the facts were stipulated by the parties. Those so stipulated are found accordingly and incorporated herein by this reference. During the taxable years involved herein, 1942 through 1946, petitioner was a manufacturer and jobber of buttons trading under the name of Lehigh324 Manufacturing Company in New York City. For the years 1942 through 1944, he filed income tax returns 1 in which he reported the following amounts of gross sales and net profits: YearGross SalesNet Profit1942$90,658.36$2,654.27194351,292.022,658.91194453,214.702,783.16Petitioner failed to make and file an income tax return for either of the calendar years 1945 or 1946. He did file declarations of estimated tax, Form 1040-ES, for each of those years, however, in which he estimated that his tax would be $150 and $400, respectively. He also filed a tentative return for 1945 on March 15, 1946, and was granted an extension of time until May 15, 1946, to file a final return for 1945. Pursuant to his request, petitioner was also granted an extension until June 16, 1947, to file his return for the year 1946. Petitioner's total actual gross sales to customers during the years involved herein, as stipulated by the parties were as follows: YearGross Sales1942$ 98,125.911943150,733.271944341,965.121945281,942.541946319,061.01A special agent of the325 Internal Revenue Service made an investigation of the income tax liability of the petitioner for the calendar years 1942 through 1946. He first contacted the petitioner on August 27, 1945, who furnished him with the following books and records for the calendar years 1942, 1943 and 1944: Cash Receipts Books, Cash Disbursements Books and General Ledgers. Subsequently, petitioner addressed a letter dated January 29, 1946, to the collector of internal revenue at Brooklyn, New York, which read as follows: "Gentlemen: "It appears that certain items of income were omitted from my tax returns for the past few years. "I should like to have a complete examination of my records made in order to correct these returns. "Very truly yours," Thereafter, when the special agent again requested to see his books, petitioner advised him that he had "disposed" of them. He subsequently stated under oath on October 15, 1947, that he had disposed of them because they were not correct or complete. The petitioner did, however, furnish adding machine tapes which listed amounts of sales, together with names of customers, for the calendar years 1943 to 1946, inclusive. He also furnished bank statements, 326 cancelled checks, payroll records, and Social Security returns for the years 1945 and 1946. The total sales figures shown on the adding machine tapes were as follows: 1943$152,537.901944340,820.911945281,942.541946319,061.01Petitioner stated to the investigating agents that the sales receipts which had not been included in his returns had been expended to purchase merchandise which also had not been included in his books and records or reflected in his returns. He admitted, however, that he was unable to substantiate the amount of purchases which were not reflected upon his books. He furnished the special agent with the names of alleged suppliers of such merchandise. The special agent subsequently contacted all of them but received no substantiation of petitioner's claims. The petitioner admitted under oath to the special agent that he had omitted from his income tax returns for the years 1942, 1943 and 1944, net income derived from unreported sales in an aggregate amount of $15,000 for the three years. On March 13, 1950, petitioner was indicted for income tax evasion for the calendar years 1943 and 1944. On February 9, 1951, his bail bond was forfeited327 and a bench warrant was issued for his arrest. Petitioner understated his net income for 1942 in the return filed for that year in the amount of $16,833.44, of which $7,467.55 was attributable to failure to report profits from the sale of merchandise, and $9,365.89 to a deduction for improperly claimed payment of commissions. The amount of the deficiency determined for 1942 was not disputed at the hearing. As appears from the transcribed interview with investigating agents, dated October 15, 1947, petitioner agreed to accept as a basis for calculating cost of unreported sales the same percentage which reported purchases bore to reported sales for each of the years involved. On this basis, the excess of unreported sales over cost of unreported sales for 1943 was determined to be $33,944.89, representing 34.14568% of $99,441.25 unreported sales. On a like basis, the excess of unreported sales over cost of unreported sales for 1944 was determined to be $119,134.15, representing 41.25852% of $288,750.42 unreported sales. In his returns for 1943 and 1944, petitioner deducted labor costs of $7,951 and $12,010.45, respectively, which costs were allowed by respondent as deductions. 328 For the years 1945 and 1946, for each of which petitioner failed to file a return, respondent (lacking any basis for determining a ratio of cost of sales to unreported sales) applied the formula which had been used in 1944, the next preceding year. He therefore determined the excess of unreported sales over cost of unreported sales for 1945 to be 41.25852% of $281,942.54, or $116,325.32, and for 1946 to be a like percentage of $319,061.01, or $131,639.85. During 1945 and 1946, petitioner paid business expenses other than merchandise costs in the total amounts of $12,790.28 (including labor costs of $8,473) and $39,969.80, respectively, which were allowed by respondent. Petitioner realized net operating income for these years as follows: 1945$103,535.04194691,670.05There is a deficiency in petitioner's income tax for each of the taxable years 1942 through 1946. Part of each such deficiency is due to fraud with intent to evade tax. Opinion The Fraud Issue On the fraud issue, the burden of proof is upon respondent. We hold that he has established by clear and convincing evidence that some part of the deficiency for each of the years in question was due329 to fraud with intent to evade income taxes. The evidence establishes substantial understatements of gross sales and of net income for each of the years 1942 to 1944, inclusive. In 1945 and 1946, no returns were filed although taxpayer operated an active business with substantial gross and net income in each such year, and was granted extensions of time for filing returns for such years. Petitioner's books and records were admittedly incorrect and incomplete, and they were "disposed of" by petitioner during the course of the investigation of his business affairs. Adding machine tapes on which petitioner recorded accounts receivable disclosed substantially higher amounts of receipts from sales for 1943 and 1944 than were recorded by him in his books or reported in his tax returns for those years. Petitioner admitted that he had substantial unreported net income during the period 1942 through 1944. In addition, when afforded a conference by investigating agents, he offered no reasonable explanation either for his various acts and omissions which had resulted in substantial understatements in his returns for the years 1942 to 1944, inclusive, or for his failure to file returns for 1945330 and 1946. Petitioner was indicted in March 1950 for income tax evasion for the years 1943 and 1944. On February 9, 1951, petitioner's bail was forfeited and a bench warrant was issued for his arrest. He did not appear at the hearing of the instant case. Prior proceedings in this case disclose that in November of 1950, petitioner and his family moved to Mexico City, (see Mindell v. Commissioner, C.A. 2, 1952, 200 Fed. (2d) 38, and there is nothing to indicate that petitioner ever returned to the United States. The facts as to petitioner's indictment for income tax evasion and the forfeiture of his bail are contained in the Stipulation of Facts, but petitioner reserved the right to object to the relevancy or materiality of that part of the Stipulation. The objection is pressed on petitioner's behalf. As already indicated in discussing the fraud issue, our determination of petitioner's fraud is based upon facts independent of those to which the objection is addressed. Nevertheless, since petitioner appears to feel that we may be influenced by knowledge of the indictment and bail forfeiture, we think he is entitled to a ruling. We overrule his objection for the following331 reasons. The indictment and bail forfeiture occurred in relation to charges of income tax evasion for two of the years here involved. The essence of the charges has a direct relationship to the issue of fraud involved in the instant case. The conduct of the petitioner in his efforts to avoid the consequences of such charges may well give rise to an inference of consciousness of guilt on his part, and therefore may reflect upon his intent. We think the applicable principles are well established and we therefore content ourselves with a brief quotation from Jones on The Law of Evidence in Civil Cases (Third Edition, 1924) in which the author states (par. 287, p. 431): "Any indications which show or tend to show a consciousness of guilt by a person suspected or charged with crime or wrongdoing who may after such indications be suspected or charged are admissible evidence against him. Thus, flight, living under an assumed name, attempt to escape, resistance to arrest, concealment, failure to appear for trial when under bonds, are all facts which may tend to show consciousness of guilt, and are in common practice received in evidence as relevant." We may add that petitioner's counsel332 referred to the indictment in cross examining Special Agent Granate, so that petitioner is hardly in a position to urge that the emergence of this fact was in any way prejudicial. As indicated, however, we think that fraud is clearly established as to each year on the basis of facts already discussed without any dependence upon inferences drawn from the indictment and bail forfeiture. Delinquency Penalties Respondent has also determined that petitioner is liable for delinquency penalties of 25% for failure to file returns for 1945 and 1946 pursuant to section 291(a) of the Internal Revenue Code of 1939. That section provides for such penalty in the case of any failure to make and file a return required by the statute within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The burden here is upon petitioner to establish reasonable cause for his failure to file. Joseph V. Moriarty, 18 T.C. 327">18 T.C. 327. Petitioner did not testify at all, and we find no persuasive evidence in the record from which we might find that he had met his burden of proof. 333 We add that the explanation made by him in his transcribed interview with the special agent on October 15, 1947, is neither adequate nor worthy of belief. Moreover, since petitioner requested and obtained permission to file late returns for both 1945 and 1946, we find no reason to accept the view that his subsequent failures to file within the periods of extension were other than willful. Income Tax Deficiencies Petitioner concedes the correctness of the determination of the deficiency for the year 1942 (except as to fraud penalties which, as already indicated, are contested as to all years). He contends, however, that the determination of deficiencies in taxes for the years 1943 through 1946 are arbitrary, and therefore invalid, within the meaning of the principles expressed in Helvering v. Taylor, (1953) 293 U.S. 507">293 U.S. 507. He argues, in part, that the determinations for these years were arbitrary because respondent did not determine larger allowances for labor costs for each year. Upon the record before us, we cannot agree with petitioner's position. For the years 1943 and 1944, respondent allowed petitioner the labor costs which he reported in the returns filed for334 those years. For 1945 and 1946, respondent allowed those labor costs which could be substantiated by petitioner's cancelled checks, payroll records, and Social Security returns. There is no evidence in the record that petitioner paid labor costs in excess of the amounts determined by respondent for any of the years in question. If the actual costs were larger, petitioner has only himself to thank for his inability to substantiate them. He can hardly expect to shift to respondent the onus of his failure to make and keep adequate records. Since the burden of proof is on the taxpayer to show that the respondent's determination is in error (or, as here asserted, arbitrary within the rule of Helvering v. Taylor, supra), his burden has not been met and we must hold against his contention. Joseph V. Moriarty, supra. Petitioner further urges that respondent was arbitrary in his determination of the net profits realized by petitioner during 1945 and 1946. The amounts of gross receipts from sales for 1945 and 1946 were stipulated. In determining the excess of unreported gross receipts over unreported cost of merchandise for the years 1943 and 1944, respondent applied335 percentages based upon the ratio of reported receipts at reported cost of merchandise in each year. Petitioner, in his interview with the investigating agent, acquiesced in this procedure. It appears to us to have been a reasonable approach in the interests of petitioner himself who was unable to substantiate any greater cost. In 1945 and 1946, however, there were no reported gross receipts or costs of merchandise and there were no records or other basis for the determination of a formula on figures for those years. Gross receipts were stipulated, however, and respondent, in determining the excess of such receipts over cost of merchandise, used the same ratio which he had used in 1944, the nearest year for which a ratio had been determined. This was 41.25852% of sales, and the resultant figures are set forth in our Findings of Fact for both 1945 and 1946. Under the circumstances, we think the determination by respondent was not only reasonable, but in the interests of petitioner who, through his own fault, was unable to substantiate any amount as representing cost of merchandise for 1945 and 1946. Again petitioner cannot seize upon his own misconduct as a basis for shifting his burden336 to respondent. Respondent, on the other hand, used the only available technique for making his calculation. It is clear that Helvering v. Taylor, supra, does not support petitioner's contention. See Joseph V. Moriarty, supra.We hold, therefore, that respondent's determination was reasonable under the circumstances rather than arbitrary. Decision will be entered under Rule 50. Footnotes1. An Income and Victory Tax Return was filed for 1943.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620869/	Percy Finkelstein v. Commissioner.Finkelstein v. CommissionerDocket No. 50678.United States Tax CourtT.C. Memo 1955-133; 1955 Tax Ct. Memo LEXIS 204; 14 T.C.M. (CCH) 496; T.C.M. (RIA) 55133; May 24, 1955204 Held, upon the facts: (1) The amounts paid by petitioner in 1947 and 1949 for business expenses. (2) That a nonbusiness debt owing to petitioner became worthless before 1947. (3) That petitioner's failure to file a return for 1947 was due to wilful neglect and a 25 per cent penalty is due under section 291(a), 1939 Code. Percy Finkelstein, 300 Riverside Drive, New York, N. Y., pro se. James E. Markham, Esq., for the respondent. HARRON Memorandum Findings of Fact and Opinion HARRON, Judge: The Commissioner determined deficiencies in income tax for 1947, 1948, and 1949, and a 25 per cent penalty under section 291(a) of the 1939 Code for 1947, as follows: YearDeficiencySec. 291(a)1947$ 112.00$28.0019482,296.3201949268.000$2,676.32$28.00205 The questions to be decided are the amounts of business expenses which petitioner incurred and paid in each of the years 1947 and 1949; whether a nonbusiness loan made by petitioner became worthless prior to 1947 and 1948; and whether petitioner's failure to file a return for 1947 was due to wilful neglect rather than reasonable cause. Findings of Fact Petitioner is a resident of New York City. He did not file an income tax return for the years 1947 and 1949. He filed a return for 1948 with the Director of Internal Revenue for Lower Manhattan. He reports income on the basis of cash receipts and disbursements. The Commissioner, for each of the years 1947 and 1949, filed a substitute for a return of petitioner. He determined that petitioner's adjusted gross income for 1947 was $1,200. He determined that petitioner's adjusted gross income for 1949 was $2,450.07. He computed the taxes for 1947 and 1949 upon the above amounts under the Supplement T tax table. In his return for 1948, the petitioner deducted $14,000 for loss from a worthless debt owing to him. The respondent disallowed the deduction. He determined that a loan of $14,000 of petitioner to his brother-in-law became206 worthless before 1947. The petitioner, during the taxable years, was a licensed real estate broker. He did not have any employees and he did not pay any rent for office space. His business activities were neither extensive nor substantial. He was employed by others, from time to time, to make real estate appraisals. He tried to make sales of real estate. In 1947 he incurred and paid business expenses in connection with various real estate matters for which he received payment of some of his fees in 1948. In 1947 and 1949, petitioner had a telephone which was located in an office in Lower Manhattan and was listed in his name. He paid the monthly charge for the telephone. In addition, he paid a monthly charge for a telephone answering service. In 1947 and 1949, petitioner paid the fee for his real estate broker's license. He paid, also, car-fare, public stenographers' charges, and the cost of stationery. The business expenses of the petitioner which he paid in each of the years 1947 and 1949 did not exceed $700 for each year. His business expenses were, at the most, as follows: 19471949Telephone bills $145 $145Answering service150150Broker's license fee2525Public stenographer100100Stationery3030Car-fare & miscellaneous250250Total $700 $700207 The petitioner did not keep records of his business expenses or of his payments of business expenses in 1947 and 1949. Petitioner loaned $14,000 to his brother-in-law prior to 1939. His brother-in-law went into bankruptcy in 1939. The indebtedness owing to petitioner did not have any value as of January 1, 1948; it became worthless before 1947. Petitioner's failure to file an income tax return for 1947 was due to wilful neglect; it was not due to reasonable cause. Opinion All of the questions to be decided are questions of fact. The record establishes that a loan of $14,000 to petitioner's brother-in-law was worthless as of January 1, 1948, and that it became worthless before 1947. The respondent's disallowance of the deduction for a worthless, nonbusiness debt which was taken in petitioner's return for 1948 is sustained. There is a deficiency in income tax for 1948 in the amount of $2,296.32. The petitioner did not keep any record of his payments of business expenses in 1947 and 1949. He had the burden of proving both the amounts of the business expenses which he paid in 1947 and 1949, and that expenditures were for ordinary and necessary business expenses. See section208 23(a)(1)(A) of the 1939 Code. He relied entirely upon his testimony. Most of the payments of and the items of business expense for each of the years in question were estimated by petitioner. Mere estimates of the amounts of alleged business expenses are not sufficient to discharge the burden of proof upon the petitioner. Upon consideration of all of the evidence, it is found and concluded that petitioner incurred and paid business expenses in each of the years 1947 and 1949 in the amount of $700, at the most. See . It is our understanding that the respondent has allowed deduction of $500 for business expenses paid in each of the years 1947 and 1949. If that is correct, the findings and conclusions which are made result in allowance of an additional deduction of $200 in each of the years 1947 and 1949. Accordingly, the deficiencies for 1947 and 1949 will be recomputed under Rule 50 of the Court's Rules. The petitioner had the burden of proving that his failure to file a return for 1947 was due to reasonable cause and was not due to wilful neglect. See section 291(a) of the 1939 Code. The petitioner failed to establish that209 his failure was due to reasonable cause. It is concluded and found that the failure was due to wilful neglect. Therefore, a 25 per cent penalty is due for 1947 under section 291(a). The amount of the penalty also will be recomputed under Rule 50. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620870/	Ernest J. Saviano and Margaret Saviano, Petitioners v. Commissioner of Internal Revenue, RespondentSaviano v. CommissionerDocket No. 15926-81United States Tax Court80 T.C. 955; 1983 U.S. Tax Ct. LEXIS 79; 80 T.C. No. 51; May 18, 1983, Filed 79 In 1978, petitioner, a cash basis taxpayer and airline pilot, acquired a gold claim in Panama through a tax shelter called "Gold For Tax Dollars." The shelter promoter, International Monetary Exchange (IME), as petitioner's agent, paid development expenses with funds of which petitioner deposited part with IME and borrowed the balance from IME on a nonrecourse obligation. Petitioner deducted the full amount of the expense under sec. 616(a), IRC 1954. Held, repayment of the nonrecourse obligation was so contingent that no debt was created, and the deduction is disallowed to the extent thereof.In 1979, petitioner leased a mineral claim in French Guiana through its agent, IME; paid IME 20 percent of the development expense in cash; financed the balance through the sale of an "option;" and claimed a deduction under sec. 616(a), IRC 1954, in the amount of the cash payment plus the "option" proceeds. Held, the "option" was illusory, thus the "option" proceeds must be recognized in 1979. Lewis H. Ferguson III, Stephen L. Urbanczyk, and Fairlea A. Sheehy, for the petitioners.Robert R. Rubin and James F. Kidd, for the respondent. Shields, Judge. SHIELDS955 OPINIONEach party has filed a motion for partial summary judgment with respect to the following issues:(1) Whether or not a nonrecourse obligation undertaken by the petitioner in 1978 is too contingent to be treated as a bona fide indebtedness for tax purposes.956 (2) Whether or not petitioner is at risk, under section82 465, 1 respecting an amount received in 1979 from the purported sale of an option.(3) Whether or not the purported option granted in 1979 is to be treated as a true option for tax purposes.The parties have filed under Rule 121, 2 affidavits in support of their respective motions. For our consideration, they have also filed joint exhibits which contain not only the petitioners' income tax returns for 1978 and 1979 but also the promotional materials leading to the transactions in dispute as well as the legal documents underlying such transactions.In their motions and in oral argument, the parties have agreed that, 83 for present purposes, we may assume the various steps of the transactions in dispute were consummated in the manner set out in the stipulated documents. Consequently, no material fact appears to be in dispute and the motions appear to be in order.For 1978 and 1979, Ernest J. Saviano and Margaret Saviano, husband and wife, filed joint income tax returns using the cash basis of accounting. At the time their petition was filed they resided in Wisconsin. Margaret Saviano is a party solely because she filed joint returns with her husband. Consequently, as used hereinafter, the word "petitioner" shall refer only to Ernest J. Saviano.During both years, the petitioner, an airline pilot, was furnished with promotional packages by International Monetary Exchange (hereinafter referred to as IME), a Panamanian corporation. The packages touted the tax advantages to be obtained by the petitioner and other high-bracket taxpayers through "investments" 3 in a leveraged tax shelter known as "Gold For Tax Dollars." Although a different shelter was 957 promoted for each year, basically the two shelters were the same in the sense that both were designed to secure for the petitioner a tax84 deduction for an expense in the current year which was at least 4 times greater than the amount of his cash outlay. Technically, however, the shelters differed because the 1978 package contemplated the payment of a substantial portion of the deductible expense from the nontaxable proceeds of a nonrecourse loan, while in 1979, a substantial portion of the payment was to be made with the proceeds from the sale of an option which would be taxable in a subsequent year when the option was either exercised or was permitted to lapse.85 The petitioner followed the instructions furnished by IME, made his "investment" in both years, claimed the suggested deductions on his tax returns, was subsequently advised by the respondent that the deductions were disallowed, and together with his wife, timely filed a petition with this Court.The 1978 TransactionAt some point in 1978, the petitioner learned of a gold mining venture in Panama which was being promoted as a tax shelter throughout the United States by IME under the name of "Gold For Tax Dollars." 4 The promotional materials distributed by IME offered high-salaried taxpayers, such as the petitioner, a means of sheltering their otherwise taxable income from Federal income tax on a ratio of 4 to 1. In other words, the petitioner was told by IME that for each $ 1 of cash he invested in the shelter in 1978, he could deduct $ 4 from his gross income. 586 958 The plan outlined in the promotional materials contemplated that a taxpayer would authorize IME as his agent to acquire a mineral lease or claim on certain gold-bearing land located in Panama. The taxpayer would then deposit with IME cash equal to one-fourth of the amount of the deduction he desired for 1978, and would borrow from IME the other three-fourths on a nonrecourse obligation which would bear interest at 10 percent but which would be payable from and secured only by the taxpayer's mineral claim. As the taxpayer's agent, IME would then, during 1978, pay over the entire sum (the one-fourth deposited by the taxpayer, plus the three-fourths represented by the nonrecourse obligation) to a mining contractor for preparing the claim for extraction of the gold. IME's materials, including a tax-opinion letter, 6 assured the taxpayer that by the adoption of the above procedure, he could become a miner in 1978. As such, he would be entitled to deduct under section 616(a) as mine development expense the entire sum paid to the mining contractor, i.e., both his deposit plus the proceeds of the nonrecourse loan.87 The petitioner, following the instructions of IME, proceeded with respect to 1978 as follows:(1) He deposited $ 10,000 with IME after determining that 4 times that amount or $ 40,000 was the amount of the deduction he needed in 1978. 788 959 (2) He obtained through IME a mineral claim on 25,000 cubic meters of gold-bearing land. He determined the number of cubic meters to be included in the claim by following IME's instructions to divide the desired deduction ($ 40,000) by the $ 1.60 per cubic meter to be paid the mining contractor.(3) He and IME executed a document entitled "Mineral Loan Agreement" under which IME, as lender, agreed to advance to him, as miner, up to 75 percent of the estimated market value of the minerals located in his mineral lease. Any advances under the agreement were to bear interest at 10 percent per annum and were to be secured by a general lien in favor of IME upon all sales, accounts, or other proceeds resulting from his mineral claim or any minerals extracted therefrom. Under the agreement, IME was also entitled to a commission of 2 percent of the net amount of any sales made from the claim. The only security for the payment of any advance, interest, or commission due under the agreement was IME's general lien.(4) He received through IME an advance of $ 30,000 under the above agreement.(5) By his agent, IME, he paid $ 40,000 (his $ 10,000 deposit plus the $ 30,000 represented89 by the above advance) to a mining contractor to "prepare the claim to extraction."(6) On his joint return for 1978, the petitioner claimed a deduction for the $ 40,000 as mine development expense. He 960 also claimed a refund of $ 15,865 from the $ 17,478 in income taxes which had been withheld from his salary as an airline pilot.Section 616(a) provides for the current deduction of mine development expenses incurred after the existence of minerals in commercially marketable quantities has been demonstrated. For purposes of this motion, the parties agree that such quantities of gold existed in petitioner's mineral claim. 890 The question we must decide is whether IME's $ 30,000 loan to petitioner was too contingent by its terms to constitute a valid obligation for which petitioner might claim a deductible payment.The respondent argues that under the very terms of the mineral loan agreement, the repayment of the $ 30,000 is too contingent to be recognized for tax purposes. He further argues that this contingency must be considered in determining whether or not the petitioner actually paid this part of the development expense claimed in 1978. It is not enough merely to accept the fact that payment was made with borrowed funds; rather, we must examine the nature of the obligation underlying the payment. Respondent concludes that no payment of the $ 30,000 was made. Hence, the deduction is not allowable to that extent.For his part, the petitioner first frames the issue as being one of pure tax accounting. He argues that the source of the funds, and any condition or contingency associated with the source of the funds or their repayment, is not relevant in this case. According to his argument, all he needs to establish as a cash basis taxpayer is that during 1978, a payment was made by him or on his91 behalf even though such payment was made with funds that were "begged, borrowed or stolen."In the alternative, petitioner argues that if contingency is relevant to our inquiry on this issue, the repayment of the advance is not so uncertain as to destroy its validity for tax purposes.961 We agree with the respondent that the petitioner has erroneously concluded that a payment for tax purposes is established merely by proof that money or other property has changed hands. The situations are too numerous to mention wherein this Court, in tax cases, and other courts, in many different areas, have examined all facets of a transaction in order to determine whether or not the parties have actually accomplished what they recited. To refrain, in cases of this nature, from looking at the underlying debt would require us to blindly examine each part of a transaction without considering the interrelation of each part to each other part or to the whole. Carried to its logical conclusion, the adoption of petitioner's argument in a future case could lead us to conclude that the exchange of funds recited in one part of a transaction constituted a payment when another part of the same transaction92 clearly provided for the repayment of the funds.For these motions the parties agree that IME paid $ 40,000 to a mining contractor in 1978. They also agree that the entire payment would constitute a mine development expense, properly deductible under section 616(a), if, for tax purposes, the payment was made by the petitioner.For the petitioner, a cash basis taxpayer, an allowable expense is deductible only in the year in which payment is made. Helvering v. Price, 309 U.S. 409">309 U.S. 409 (1940). The word "payment" has a particular meaning in the tax law. Payment occurs only when a taxpayer's money is "irretrievably out of pocket." Keller v. Commissioner, 79 T.C. 7">79 T.C. 7, 36 (1982), quoting Ernst v. Commissioner, 32 T.C. 181">32 T.C. 181, 186 (1959). In general, if a taxpayer pays an expense with funds borrowed from a third party, the expense is deductible when paid, not later when the loan is repaid. McAdams v. Commissioner, 198 F.2d 54">198 F.2d 54 (5th Cir. 1952); Crain v. Commissioner, 75 F.2d 962">75 F.2d 962 (8th Cir. 1935); Granan v. Commissioner, 55 T.C. 753">55 T.C. 753 (1971).93 But a contingent future obligation of a cash basis taxpayer is not deductible until the debt is actually paid. Cavanaugh v. Commissioner, 2 B.T.A. 268">2 B.T.A. 268, 272 (1925).In the application of these general principles, it has been repeatedly held that if a payment is contingent upon some future event, such payment cannot be recognized. Brountas v. Commissioner, 692 F.2d 152 (1st Cir. 1982), and CRC Corp. v. 962 , 693 F.2d 281">693 F.2d 281 (3d Cir. 1982), vacating and remanding on different grounds 73 T.C. 491">73 T.C. 491 (1979); Gibson Products Co. v. United States, 637 F.2d 1041">637 F.2d 1041 (5th Cir. 1981), affg. 460 F. Supp. 1109">460 F. Supp. 1109 (N.D. Tex. 1978); Denver & Rio Grande Western R.R. Co. v. United States, 205 Ct. Cl. 597">205 Ct. Cl. 597, 505 F.2d 1266">505 F.2d 1266 (1974); Lemery v. Commissioner, 52 T.C. 367">52 T.C. 367 (1966), affd. on another issue 451 F.2d 173">451 F.2d 173 (9th Cir. 1971); Columbus & Greenville Railway Co. v. Commissioner, 42 T.C. 834">42 T.C. 834 (1964),94 affd. per curiam 358 F.2d 294">358 F.2d 294 (5th Cir. 1966); Albany Car Wheel Co. v. Commissioner, 40 T.C. 831">40 T.C. 831 (1963), affd. per curiam 333 F.2d 653">333 F.2d 653 (2d Cir. 1964); Redford v. Commissioner, 28 T.C. 773">28 T.C. 773, 777 (1957); Sunburst Oil & Refining Co. v. Commissioner, 23 B.T.A. 829">23 B.T.A. 829 (1931).In Sunburst Oil & Refining Co. v. Commissioner, a taxpayer's liability for expenses of drilling oil and gas wells was contingent and held not accruable since payment was to be made solely from the taxpayer's share of production from the drilled wells. Although the liability was fixed in amount, it would occur only "if and when sufficient oil was produced from the wells to pay it." 23 B.T.A. at 836.Sunburst Oil differs from the instant case in that it concerned a deduction of an accrual basis taxpayer whereas Mr. Saviano reports his income and disbursements on the cash method of accounting. Nevertheless, we do not believe this distinction to be controlling. An obligation so indefinite that it may not be accrued similarly may not be expensed. 95 The loan agreement herein makes clear that repayment is conditioned on the sale of gold from petitioner's claim. IME will be repaid only if and when sufficient gold is produced from the mine and sold.More recently, the First, Third, and Fifth Circuits have ruled that an obligation, repayment of which was contingent upon future production of oil and gas, could not be accrued and deducted in the year that the amount of the liability became fixed. Brountas v. Commissioner, supra; CRC Corp. v. Commissioner, supra; and Gibson Products Co. v. United States, supra.Those cases concerned limited partnership drilling ventures which bought participations in certain oil and gas leaseholds. The partnerships then contracted with the driller-operator of the leaseholds to drill exploratory wells. They paid 40 percent of the drilling costs in cash and gave nonrecourse notes for the 963 remaining 60 percent. Although the notes were secured by the leaseholds, as a practical matter repayment would occur only if oil were produced from the wells. There, as here, repayment was contingent upon the occurrence of a future event. 96 All three circuits held that the noncash portion of the drilling costs was not accruable by the partnerships or deductible by the limited partners. They held that the nonrecourse notes were too speculative to constitute bona fide liability, reasoning that "all events" necessary to fix the fact of liability had not occurred in the year the deductions were taken. 997 We realize that some of the cited cases involved contingent future payments which were claimed by taxpayers on the accrual basis of accounting. Others involved attempts by taxpayers to add contingent future payments to the basis of assets for depreciation or some other amortizable purpose. We believe, however, that the underlying principles are applicable with equal force here. In other words, an item of expense which, under the terms of a document underlying the transaction, is too contingent for accrual purposes is obviously too uncertain to constitute a payment for cash purposes. Furthermore, a liability which, under similar circumstances, is too contingent to be allowed as a portion of a taxpayer's basis in an asset, because it is dependent in whole or in part upon a future event, would also be too contingent to be allowed as a cash deduction.In this case, the petitioner is not personally liable for the repayment of the advanced funds. No term in the loan agreement requires him to pay his debt to IME nor does any term in the mineral lease or loan agreement require him to extract any gold or sell any gold which is extracted, both of 964 which are conditions precedent98 to the payment of the advance. 10Moreover, the promotional literature in this case does not emphasize the soundness of the petitioner's investment nor discuss the activity which would be associated with the mining venture. For example, there is no discussion of the costs associated with production or who will bear them. In fact, practically all of the discussion and emphasis is on sheltering income from taxation with scant attention given to the problems and processes of extracting gold or selling 99 the same.It is clear that a cash basis taxpayer cannot deduct an expense incurred unless it has been paid during the taxable year. Section 1.461-1(a)(1), Income Tax Regs. The crucial question raised here is whether the nonrecourse obligation running from petitioner to his agent, IME, constituted payment of the development expense by petitioner so as to create a deductible expense in the year the note was executed. "[Until] a cash basis taxpayer suffers an economic detriment, i.e., an actual depletion of his property, he has not made a payment which will give rise to an expense deduction." Rife v. Commissioner, 356 F.2d 883">356 F.2d 883, 889 (5th Cir. 1966), revg. 41 T.C. 732">41 T.C. 732 (1964); see also Jergens v. Commissioner, 17 T.C. 806">17 T.C. 806, 809 (1951).This principle is analogous to that enunciated in Helvering v. Price, 309 U.S. 409">309 U.S. 409 (1940), that a cash basis taxpayer's expenditures paid with a promissory note may not be deducted until the note is satisfied. Eckert v. Burnet, 283 U.S. 140">283 U.S. 140 (1931). This is because if the note is never paid, the taxpayer will100 have given up nothing except his promise to pay. Don E. Williams Co. v. Commissioner, 429 U.S. 569">429 U.S. 569, 578 (1977); Hart v. Commissioner, 54 F.2d 848">54 F.2d 848, 852 (1st Cir. 1932). Similarly, an accrual basis taxpayer would not be permitted to deduct the amount of the note until the liability becomes certain. Gibson Products v. 965 .See also Graf v. Commissioner, 80 T.C. 944">80 T.C. 944 (1983), decided this day, wherein cash basis taxpayers attempted unsuccessfully to deduct amounts paid to a dredging subcontractor which were borrowed from IME, an independent third party, in the form of a promissory note repayable only out of profits from the sale of oceanfront lots created by the dredging operation.We conclude that with respect to petitioner's $ 30,000 "advance" from IME, petitioner did nothing more than attempt to create an artificial tax benefit. Consideration of the documentation alone clearly establishes that no actual obligation was intended or created and no economic detriment suffered for which a deduction can be allowed under section 616(a) or 101 any other section. 11The 1979 TransactionIn 1979, IME offered the petitioner and other similarly situated taxpayers a slightly different tax shelter. Once again, IME's promotional102 materials touted a 4 for 1 tax writeoff, but this time the gold-bearing land 12 was located in French Guiana and the plan was based in part on the sale of an "option" 13 rather than the nonrecourse loan which was used in 1978. The change from the nonrecourse loan in 1978 to the option in 1979 was admittedly made by IME because a change in the law had specifically eliminated the use of nonrecourse loans for years after 1978. 14103 966 According to the plan outlined in the 1979 materials, the petitioner could qualify for the 4 for 1 tax writeoff by authorizing IME as his agent to acquire a mineral claim on certain gold-bearing land located in French Guiana. The petitioner would then deposit with IME cash equal to one-fourth of the amount of the deduction which he desired in 1979. Acting through IME as his agent, he would sell, for cash, an option to buy the gold extracted from the claim for an amount equal to the other three-fourths of the desired deduction. As in 1978, IME would then pay a mining contractor the entire sum (the one-fourth deposited by the petitioner plus the three-fourths received from the option) for preparing the claim for extraction of the gold.In 1979, IME again assured the petitioner both in its own materials as well as in the accompanying opinion letter 15 that if he carefully followed the instructions provided, he would 967 qualify as a miner and would be entitled to deduct under section 616(a) the entire sum paid to the mining contractor as a mine development expense. He was also assured that he would not be subject to tax on the proceeds received on the sale of the104 option until in some later year when the option either lapsed or was exercised.The option could be exercised only after the commencement of production. As in 1978, petitioner was not required under the terms of the mineral claim or the option to extract any gold.Again following the instructions furnished by IME, the petitioner proceeded as follows:(1) He deposited $ 8,000 with IME.(2) He obtained through IME a mineral claim on 20,000 cubic meters of gold-bearing land. He determined the number of cubic meters to be covered by the claim by following IME's instructions to divide the desired deduction ($ 40,000) by the $ 2 per cubic meter which had to be paid to the mining contractor.(3) He sold through IME an option to purchase any gold extracted from his claim for $ 32,000.(4) IME, as his agent, paid $ 40,000 (the petitioner's $ 8,000 deposit plus the $ 32,000 received for the option) 16 to a mining contractor to prepare the claim for the 105 extraction of gold.(5) On his 1979 joint income tax return, the petitioner claimed a $ 40,000 deduction as mine development expense. He also claimed a refund of $ 15,667 of the $ 19,914 in income taxes which had been withheld from his salary as an airline pilot. He did not report as income the $ 32,000 he received in 1979 for the option.Respondent argues that petitioner's deduction should be denied to the extent of the $ 32,000 obtained from the sale of the option. He further argues that the option proceeds should be taxed in 1979 rather than deferred to a later year. He advances three 106 grounds in support of his position: (a) The option transaction is the economic equivalent of a nonrecourse loan, governed by section 465 and regarding which petitioner 968 should not be considered "at risk"; (b) the arrangement was not an option but was in reality a sale of minerals in place based upon a formula for the division of the mining proceeds, and consequently, the proceeds did not qualify for tax deferral in 1979; and (c) the arrangement was not a true option, the proceeds of which would qualify for tax deferral, but was a contractual right of first refusal or preferential treatment, the proceeds of which should be taxed in 1979.For his part, petitioner denies that section 465 governs the transaction; denies that the optionholder acquired an economic interest in his mining claim; and asserts that the arrangement created a binding, legal option, the income from which should not be recognized until the option is exercised or lapses.In weighing the arguments of the parties, we have carefully considered all the documents submitted in connection with the 1979 transaction -- the promotional materials, the authorization agreement, the mineral claim lease, and the option. 107 17 Because we decide for respondent on the basis of his third contention, we need not reach his other arguments.Section 451(a) provides that an item of income shall be included in gross income in the taxable year in which received by the taxpayer unless the taxpayer's method of accounting would provide for recognition in a different taxable year. A cash basis taxpayer must include items of income in gross income in the year actually or constructively received. Sec. 1.451-1, Income Tax Regs.The petitioner108 points out that one exception to these longstanding rules of recognition is that when it cannot be determined whether payments received will, at some future date, represent income or a return of capital, then they are not taxed until their character becomes fixed. Burnet v. Logan, 283 U.S. 404">283 U.S. 404 (1931); Dill Co. v. Commissioner, 33 T.C. 196">33 T.C. 196 (1959), affd. 294 F.2d 291">294 F.2d 291 (3d Cir. 1961); Virginia Iron, Coal & Coke Co. v. Commissioner, 37 B.T.A. 195">37 B.T.A. 195 (1938), affd. 99 F.2d 919">99 F.2d 919 (4th Cir. 1938), cert. denied 307 U.S. 630">307 U.S. 630 (1939).969 Petitioner then argues that the proceeds received in 1979 from the sale of the option to purchase gold are not taxable until the option is exercised or lapses. He admits that the income will eventually be taxed at ordinary rates but contends that the cost of goods sold may affect the amount of taxable income to be reported, so that deferral is proper.Respondent agrees that binding legal options are not taxed currently. 18 But he contends that no such option exists here. He maintains109 that IME merely labeled the 1979 transaction an option in order to invoke the principle of deferral. He points to the fact that contrary to the usual provision, the petitioner, even though grantor of the option, is actually the party with a choice. If the petitioner decides not to mine gold, the option-holder will never have the opportunity to purchase it. The respondent concludes, therefore, that this condition precedent to the exercise of the option negates the option's validity for tax purposes and requires the proceeds to be recognized currently.110 For support, the respondent relies on Saunders v. United States, 450 F.2d 1047">450 F.2d 1047 (9th Cir. 1971). In Saunders the taxpayer obtained a "special option" to purchase real estate. The agreement provided, however, that the grantors could repurchase the option at any time prior to its exercise. When Saunders gave notice of an intention to exercise the option, the owners promptly repurchased it. Saunders treated the amount he received on the repurchase as capital gain. The Federal District Court agreed. Saunders v. United States, 294 F. Supp. 1276 (D. Hawaii 1968). The Ninth Circuit reversed the District Court and held the gain reportable currently as ordinary income. On account of the defeasance provision, the so-called 970 special option did not qualify for deferral or treatment as capital gain under section 1234. 19 The Ninth Circuit commented:As a consequence Owners were not bound to sell and convey; they were afforded an alternative. And for that reason the "Special Option" did not create a "privilege or option" entitled to be accorded capital gains treatment by 26 U.S.C. § 1234.111 That section is limited in application to unilateral agreements which are inflexibly binding upon the purported vendor. * * [450 F.2d at 1049.]The common law principles applicable to option contracts are well settled. An option contract has two elements: (1) A continuing offer to do something, or to forbear, which does not become a contract until accepted; and (2) an agreement to leave an offer open for a specified or reasonable period of time. 20Koch v. Commissioner, 67 T.C. 71">67 T.C. 71, 82 (1976); Carter v. Commissioner, 36 T.C. 128">36 T.C. 128, 130 (1961); Drake v. Commissioner, 3 T.C. 33">3 T.C. 33, 37 (1944).112 If the optionee's power to accept is dependent upon some further act of the offeror, then there is no unconditional option contract, rather the offeree has nothing more than a conditional preferential right of first refusal. 21 An offer that does not create an unconditional power of acceptance in the offeree has been called an illusory promise. See 1 A. Corbin, Contracts, sec. 145, and vol. 1A, sec. 261 (1963 ed. & Supp. 1982).113 Applying the foregoing law to the agreement herein, we think it clear that petitioner's offer to sell extracted gold at a fixed unit price was illusory. This is so because the offer did 971 not create in the optionholder an unconditional power of acceptance. The so-called gold option, when construed from its four corners, appears to be nothing more than a preferential right of first refusal. As we view the agreement, the offeree's power of acceptance is severely limited by the condition that it is subject to the petitioner's decision to mine gold. The optionee has no power to compel him to produce. He has, at most, a mere expectancy of purchasing gold. Booker v. Commissioner, 27 T.C. 932">27 T.C. 932 (1957).Petitioner describes his financing vehicle as a "conditional option" and refers to the "conditional nature of the option." We have found no case law, nor has he cited us to any, in support of his hypothesis that such an option qualifies for tax deferral. To the contrary, the courts have treated such an "option" as vague and unenforceable. See Saunders v. United States, supra; Booker v. Commissioner, supra.We conclude114 that the right to purchase extracted gold was not a binding, legal option.In summation, we conclude that there is no dispute as to any fact material to the motions for partial summary judgment and that a decision on the issues presented by such motions may be rendered as a matter of law. Accordingly, we hereby:(a) Grant the respondent's motion for partial summary judgment to the effect that the nonrecourse obligation which the petitioner incurred in 1978 upon the execution of the mineral loan agreement is too contingent and uncertain to be considered a valid indebtedness for tax purposes, and deny the petitioner's motion to the contrary; and(b) Grant respondent's motion for partial summary judgment to the effect that the purported option granted by the petitioner in 1979 is not a true option for tax purposes and the amount received in consideration therefore does not qualify for tax deferral; and deny the petitioner's motion to the contrary.An appropriate order will be entered. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩2. Unless otherwise indicated, any reference to "Rules" shall be deemed to refer to the Tax Court Rules of Practice and Procedure.↩3. The Securities and Exchange Commission has brought suit against IME and one Gerald L. Rogers, a.k.a. T.T. Smith III, the purported controller of IME, as well as several other parties, for possible violations of the Securities and Exchange Acts of 1933 and 1934, 15 U.S.C. sec. 77, et seq., in connection with the offer and sale of "Gold For Tax Dollars" securities. S.E.C. v. Rogers, et al↩., No. 80-04841-MRP (C.D. Cal., filed Oct. 30, 1980). In addition, at least nine States have issued orders halting sales of "Gold For Tax Dollars" within their jurisdictions.4. Respondent has disallowed deductions totaling more than $ 120 million in such shelters involving approximately 3,000 taxpayers of whom about 175 have petitions pending in this Court.↩5. In 1978, IME explained the shelter as follows:In brief, the law provides that as a miner you can deduct the development cost in the year incurred. By borrowing nonrecourse $ 3 for every $ 1 of your own and by paying the total funds out as development expenses this year, a 400% tax shelter occurs. (A 400% tax write-off will turn 50% of your tax liability into "spendable Cash" and the other 50% into a "Gold Asset.")You can start with as little as $ 5,000 and in increments of $ 2,500 thereafter, but for illustration purposes, if you or your corporation needs a $ 100,000 tax write-off, you would:1. Put up $ 25,000.2. Borrow "nonrecourse" $ 75,000 (completely tax deductible under the 1976 Act and the 1978 Tax Reform Act.)3. Pay the total $ 100,000 out as deductible development costs this year.4. Expect, based on assays and current prices, to recover a gold profit of approximately $ 50,000.TAX BENEFITS1. $ 100,000 tax deduction from your taxable income this year.2. Realize a federal tax savings up to $ 70,000.3. Pay no taxes until you decide to sell the extracted gold.RESULT: GOLD FOR TAX DOLLARS, PLUS UP TO $ 45,000 IN SPENDABLE CASH!↩6. The opinion letter was not issued by petitioner's present counsel.↩7. The instructions stated, in part:"The minimum capital requirement is $ 5,000 which can result in a $ 20,000 tax write-off or 4 times the cash you invest. * * * The following chart correlates, cash requirement to tax write-off (deductible expenses) to cubic meters to be mined under your Mining Claim Lease Agreement."CashDesiredTotal m<3>developmenttax write-offDevelopmentdevelopedcapital(deductible expenses)cost per m<3>for mining$ 5,000 x 4=$ 20,000/$ 1.60=12,5007,500 x 4=30,000/1.60=18,75010,000 x 4=40,000/1.60=25,00012,500 x 4=50,000/1.60=31,25015,000 x 4=60,000/1.60=37,50017,500 x 4=70,000/1.60=43,75020,000 x 4=80,000/1.60=50,00022,500 x 4=90,000/1.60=56,25025,000 x 4=100,000/1.60=62,500"If a greater tax deduction is desired than indicated in the above chart, just divide your desired tax write-off by 4 and that will equal the cash capital requirement. To obtain the number of cubic meters that must be mined under the mining lease, divide the tax write-off you desire by $ 1.60."* * * "After you have determined your cash capital requirement, expenses to be incurred and cubic meters to be mined, fill in the forms and proceed as follows:" * * "(6) Upon payment of the mining development expense, copies of the invoices and cancelled checks for mining services paid for by your agent, will be sent for tax purposes. Your records will include Mineral Claim Lease, Loan Agreement, Paid invoices, and cancelled checks all executed on or before December 31, 1978."↩8. Sec. 616(a) states in relevant part:SEC. 616(a)↩. In General. -- Except as provided in subsection (b), there shall be allowed as a deduction in computing taxable income all expenditures paid or incurred during the taxable year for the development of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercially marketable quantities has been disclosed. * *9. Our opinion in Brountas did not reach the question of contingency inasmuch as we determined the nonrecourse notes therein to be production payments under sec. 636. We held that such characterization converted the notes into binding legal obligations regardless of whether repayment was speculative. Brountas v. Commissioner, 73 T.C. 491">73 T.C. 491, 569 n. 84 (1979). The First and Third Circuits disagreed, holding that the character of a loan would not change merely because it was treated as a production payment. Brountas v. Commissioner, 692 F.2d 152">692 F.2d 152 (1st Cir. 1982); CRC Corp. v. Commissioner, 693 F.2d 291">693 F.2d 291 (3d Cir. 1982). Nothing in our opinion herein implies that we necessarily accept the views of the First and Fifth Circuit Courts of Appeals as to the role of sec. 636 -- the section upon which our decision in Brountas↩ was founded.10. The promotional literature made clear that the petitioner controlled the timing of production and sale of gold. For example, a question and answer sheet stated:11. Who determines when the claim shall be put into production? You do. As the miner, under the "Mineral Lease Agreement" you have complete control over the time when production takes place.12. Do you have to agree to ever sell the gold to anybody? No.The brochure stated "Pay no taxes until you decide↩ to sell the extracted gold."11. Our opinion is not changed by the recent United States Supreme Court opinion in Commissioner v. Tufts, 461 U.S. (1983), which held that where a taxpayer disposes of property encumbered by nonrecourse indebtedness in an amount that exceeds the fair market value of the property, the Commissioner may require him to include the outstanding amount of the obligation in his amount realized. The Supreme Court, relying upon the Commissioner's treatment and more than 35 years of judicial sanction, held that the debt should be treated as a true loan. The instant situation does not fit within the context of Tufts and Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947). Our decision is based on the unreasonably and artificially inflated amount of the nonrecourse indebtedness which was not the fact in Tufts↩.12. For these motions the parties have agreed that gold in commercially marketable quantities was present in the claim.↩13. The terms "option" and "optionholder" as used herein are not intended to describe the character of the transaction under Federal tax law, but instead are used solely for clarity and convenience.↩14. The IME brochure stated:HISTORY: In 1978 the International Monetary Exchange was able to negotiate for its clients a nonrecourse loan of $ 3 for every $ 1 of development equity on proven mineral reserves on a number of major placer gold claims. Under the 1978 Tax Reform Act, nonrecourse loans can no longer be expensed and deducted from a U.S.A. citizen's adjusted gross income. This problem is very easily resolved, and, in fact, improved upon through the sale of "Gold Options."CURRENT: A 400% or 4 to 1 tax shelter occurs when the following business transaction is entered into:1. An individual or company leases a mining claim that needs to be developed. For illustration purposes: (cost of development is $ 100,000).2. Instead of borrowing money on a nonrecourse basis, you sell a "Gold Option" for $ 75,000 to another third party who wishes to buy all the gold in the ground at approximately 50% of today's extracted and refined price for a period of time up to 8 years.3. You hire a subcontractor to do the development work, add $ 25,000 of your own to the $ 75,000 option money and pay the contractor the total $ 100,000 this year to professionally develop the property so the auriferous vein flow is established and can easily be extracted.RESULT: A $ 100,000, 4 to 1 write-off is created. Plus, the ordinary income is converted into a capital gain in the year the option expires or is exercised up to 8 years from now.FOR EXAMPLE:1. Your adjusted gross income$ 125,000 2. Lease claim 1979 income03. Option premium development cash$ 75,0004. Your cash25,0005. Tax deduction (development expense)100,000(100,000)New 1979 adjusted gross income25,000 In other words, you can use the option premium for the professional development and pay no tax until the option expires or is exercised. In the instant case, the optionee has up to 8 years to exercise his option. Under current law a short term capital gain of $ 75,000 will result in the above transaction. Mining claims are available for as little as $ 5,000 in personal development cash for a minimum $ 20,000 tax deduction (See Instructions).↩15. The opinion letter was not issued by petitioner's current counsel.↩16. The record at this point fails to disclose why the $ 40,000 deal as actually consummated in 1979 included a deposit of $ 8,000 and the sale of an option for $ 32,000 when IME's promotional materials and instructions would have required a $ 10,000 deposit and a $ 30,000 sale. In any event, the unexplained and favorable increase obtained by the petitioner in the tax writeoff from 4 to 1 to 5 to 1 does not affect our decision.↩17. For purposes of these motions, the parties agree that the transactions in issue were imbued with economic substance. Nonetheless, we feel constrained to note that with or without economic substance the 1979 scheme, like that of 1978, both products of a fertile imagination, was carefully designed to avoid current taxation on otherwise taxable income. The sad feature is that their exotic nature has seduced thousands of taxpayers into a minimum investment of $ 2,500 followed at best by years of doubtful litigation.↩18. Respondent's position on the includability of option payments in income has been published in Rev. Rul. 58-234, 1 C.B. 279">1958-1 C.B. 279, 283, which provides in part:"An optionor, by the mere granting of an option to sell ('put'), or buy ('call') certain property, may not have parted with any physical or tangible assets; but, just as the optionee thereby acquires a right to sell, or buy, certain property at a fixed price during a specified future period or on or before a specified future date, so does the optioner become obligated to accept, or deliver, such property at that price, if the option is exercised. Since the optioner assumes such obligation, which may be burdensome and is continuing until the option is terminated, without exercise, or otherwise, there is no closed transaction nor ascertainable income or gain realized by an optioner upon mere receipt of a premium for granting such an option. The open, rather than closed, status of an unexercised and otherwise unterminated option to buy (in effect a 'call') was recognized for Federal income tax purposes, in A.E. Hollingsworth v. Commissioner, 27 B.T.A. 621">27 B.T.A. 621↩ (1933)."19. Sec. 1234 prescribes rules for the income tax treatment of the grantor and grantee of an option in a closing transaction and where an option lapses, neither of which is at issue in the instant case. See sec. 1234(a) and 1234(b); sec. 1.1234-1, Income Tax Regs.↩20. 1 Restatement, Contracts 2d, sec. 25 (1981), defines an option contract as a "promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer." Sec. 24 defines an offer as "the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it." See Bratt v. Peterson, 31 Wis. 2d 447">31 Wis. 2d 447, 143 N.W.2d 538">143 N.W.2d 538 (1966); see generally Hermes v. William F. Meyer Co., 65 Ill. App. 3d 745">65 Ill. App. 3d 745, 22 Ill. Dec. 451">22 Ill. Dec. 451, 382 N.E.2d 841">382 N.E.2d 841↩ (1978).21. Professor Williston defines an option as "a contract to keep an offer open" for a certain period of time. 1 S. Williston, Contracts, sec. 61A (1957 ed. & Supp. 1982). He describes the nature of an option as a "unilateral contract which binds the optionee to do nothing but grants him the right to accept or reject the offer in accordance with its terms." Sec. 61B. See generally Owens v. Upper Neches River Municipal Water Authority, 514 S.W.2d 58">514 S.W.2d 58 (Tex. Civ. App. 1974); Puetz v. Cozmas, 237 Ind. 500">237 Ind. 500, 147 N.E.2d 227">147 N.E.2d 227↩ (1958).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620871/	GARY J. BELLINGER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBellinger v. CommissionerDocket No. 1735-94.United States Tax CourtT.C. Memo 1995-443; 1995 Tax Ct. Memo LEXIS 442; 70 T.C.M. (CCH) 734; September 19, 1995, Filed 442 Decision will be entered for respondent. William M. Ravkind, for petitioner. Linda L. Wong, for respondent. WHALEN, Judge WHALENMEMORANDUM FINDINGS OF FACT AND OPINION WHALEN, Judge: Respondent determined the following deficiency in and additions to petitioner's 1988 Federal income tax: Additions to TaxDeficiencySec. 6653 (a) (1)Sec. 6661 (a)$ 41,070$ 2,053$ 10,268 Unless stated otherwise, all section references are to the Internal Revenue Code as in effect during 1988. After concessions, the issues remaining for decision are: (1) Whether petitioner failed to report gross receipts of $ 102,200; (2) whether petitioner is entitled to deduct legal fees of $ 21,000 as claimed on Schedule C of petitioner's 1988 return; (3) whether petitioner is liable for an addition to tax under section 6653(a)(1) for negligence or disregard of rules and regulations; and (4) whether petitioner is liable for an addition to tax under section 6661(a) for a substantial understatement of tax liability. FINDINGS OF FACT Some of the facts have been stipulated by the parties. The Stipulation of Facts filed by the parties and the exhibits attached thereto are incorporated herein443 by this reference. Petitioner resided in Dallas, Texas, at the time the petition in this case was filed. For calendar year 1988, petitioner filed a joint income tax return with his spouse, Mrs. Sheila J. Bellinger. In due course, respondent issued a single notice of deficiency in which respondent determined the tax deficiency and additions to tax mentioned above. Petitioner and his wife filed separate petitions in this Court each asking for redetermination of respondent's determination. Both petitions were consolidated for trial, briefing, and opinion. Thereafter, Mrs. Bellinger and respondent submitted a stipulated decision which was entered by the Court and disposed of Mrs. Bellinger's case. During the year 1988, petitioner was involved in the operations of a medical equipment company called American Medical Laser, Inc. (AML), which was in the business of leasing medical laser equipment. AML was managed by petitioner and Mr. Steve Hibler. It was a subsidiary of AML International Ltd. (AMLI). Following audit of petitioner's 1988 income tax return, respondent found that during 1988 petitioner had received gross income totaling $ 109,700. Petitioner had reported gross sales of $ 444 7,500 on the Schedule C, Profit or Loss from Business (Sole Proprietorship), attached to his 1988 return. Accordingly, respondent determined that petitioner had realized unreported income during 1988 of $ 102,200. Respondent also determined that petitioner was not entitled to a deduction of $ 21,000 for legal and professional fees, as claimed on petitioner's Schedule C. Set out below is a list of the source and amount of each of the income items that petitioner received during 1988: DateDescriptionAmount1/20/88Check 017 from AML's acct. 17764 at Premier Bk.$ 5,0001/25/88Check 005 from AML's acct. 17764 at Premier Bk.15,0001/27/88Check 1295 from AML's acct. 17764 at Premier Bk.15,0002/01/88Check 1306 from AML's acct. 17764 at Premier Bk.1,0002/03/88Check 1310 from AML's acct. 17764 at Premier Bk.3,2002/15/88Check 1340 from AML's acct. 17764 at Premier Bk.7,5005/09/88Withdrawal from AML's acct. 1777-2 at Premier Bk.1,0006/03/88Withdrawal from AML's acct. 1778-0 at Premier Bk.2,5007/18/88Transfer from First Nat. Bk. of Kennedale2,000(First Nat.) (SH Inv)7/19/88Transfer from 1000603, First Nat. (SH Inv)2,0008/25/88Transfer from 1000603, First Nat. (SH Inv)22,0008/29/88Transfer from 1000603, First Nat. (SH Inv)4,0008/30/88Check 44 from 1000603, First Nat. (SH Inv)14,50011/09/88Deposit from 20438, client tr. acct. at Premier Bk.15,000Total109,700445 Each of the seven checks listed above was made payable to petitioner or to Premier Bank and was endorsed by petitioner. Check No. 1306, dated February 1, 1988, in the amount of $ 1,000, contains the notation "petty cash". Check No. 1310, dated February 3, 1988, in the amount of $ 3,200, contains the notation "SWMS". Check No. 1340, dated February 15, 1988, in the amount of $ 7,500, contains the notation "payroll". Both of the cash withdrawals listed above were made from AML's account at Premier Bank. They were made using nonnegotiable bank forms signed by petitioner. Each of the four transfers listed above reflects a transfer of cash from an account at the First National Bank of Kennedale in the name "SH Investments" to an account owned by petitioner at the same bank. It appears that the SH Investments account was owned by petitioner's business associate, Mr. Steven Hibler. The deposit of $ 15,000 listed above was made into a client trust account maintained by petitioner's attorney, Mr. John P. Covington, on petitioner's behalf. The funds for this deposit came from a check dated November 7, 1988, drawn by Key Financial Services, Inc., in the amount of $ 162,000, and made payable446 to AML. The check was endorsed by petitioner and his attorney, Mr. Covington, and it was deposited into three client trust accounts maintained by Mr. Covington. As mentioned above, $ 15,000 was deposited into petitioner's trust account. The amount of $ 67,000 was deposited into a client trust account maintained by Mr. Covington under the name "S.H. Investments-J.P.C.", and $ 80,000 was deposited into a client trust account under the name "American Medical Laser Inc." In 1992, petitioner was charged in the U.S. District Court for the Northern District of Texas, Dallas Division, with two counts of mail fraud under 18 U.S.C. section 1341 for engaging in a fraudulent equipment-leasing scheme during 1992. The U.S. attorney's factual resume filed in the District Court describes the scheme as follows: defendant Gary J. Bellinger engaged in a scheme to defraud equipment leasing companies of money by fraudulently representing to the companies that Dallas area doctors either owned or were purchasing pieces of medical [sic] which they would sell to the leasing companies with the understanding that the equipment would be leased back to the doctors. 447 * * * * Bellinger never intended to deliver the equipment as promised and in fact the equipment which was the subject of Bellinger's scheme never existed.Petitioner pled guilty to both counts of the information and was sentenced to 15 months in prison. OPINION Respondent reconstructed petitioner's gross receipts for 1988 using the specific items method of proof. See generally United States v. Smith, 890 F.2d 711">890 F.2d 711, 713 (5th Cir. 1989); United States v. Horton, 526 F.2d 884">526 F.2d 884, 886 (5th Cir. 1976). According to respondent's reconstruction, petitioner had realized gross income during 1988 in the amount of $ 109,700, consisting of the 14 specific items described above. Respondent's determination of a deficiency in petitioner's tax, based upon that reconstruction, is presumed correct, and petitioner bears the burden of proving it wrong. Rule 142. All Rule references are to the Tax Court Rules of Practice and Procedure. At the outset, we note that petitioner complains in his post-trial brief that petitioner's business records were unavailable at trial "because they had been removed by one of his business associates with448 whom he was having a dispute." Petitioner also complains that the bank records of petitioner's various transactions were not available at trial because "the banks involved have been closed by the FDIC." While petitioner's post-trial brief makes general mention of these matters, it fails to delineate any attempt made by petitioner to obtain these documents. We also note that the Trial Memorandum For Petitioner Gary J. Bellinger, received by the Court on November 22, 1994, less than 2 weeks before the trial of this case, states that petitioner's attorney is "unable to provide summary of facts because [he] cannot locate client." Furthermore, it appears that petitioner failed to seek records in the possession of Mr. Chris Payne, an attorney with the Branson law firm, who had represented AML and AMLI, and who had collected various records concerning the activities of petitioner and his business associate, Mr. Hibler. At trial, petitioner's attorney initially sought a continuance "to review the documents at the Branson office, which we just found out about, to see if they do indeed provide any substantiation of the taxpayer's claim." Petitioner's attorney suggested: I imagine Mr. 449 Payne could probably tell me whether or not he has got his personal -- the agent said they don't have his [petitioner's] personal records, which may end it. Because all we are looking for is his personal bank records of his personal account to see if we can show the business expenses * * * and if Mr. Payne tells me they don't have them, I respect Mr. Payne enough that I would take his word for it.The Court directed petitioner's attorney to make that inquiry of Mr. Payne. Based upon that information, the Court suggested that it would give petitioner's attorney "an opportunity to remake your application" to inspect the records held by Mr. Payne's firm. The Court further stated as follows: If there are records that show that that money went through his hands, and were paid -- and was paid for business expenses, I would like to know about it. But I don't want to spend a week, or month, going through 60 boxes of documents to do it.However, when this case was recalled on the following day, petitioner's counsel failed to raise this matter and failed to remake his application to review the records held by Mr. Payne's law firm. Petitioner acknowledges that "receipts by taxpayers450 are includable in gross income unless otherwise explained." Petitioner, however, advances no legal or factual basis to overcome respondent's determination that each of the 14 specific items, described above, is includable in petitioner's gross income for the year 1988. Similarly, petitioner does not take issue with respondent's use of the specific items method to reconstruct his income for 1988. The only argument advanced by petitioner in his post-trial brief is that five of the specific items that were included in respondent's determination of his gross income, together with a sixth item that was not part of respondent's determination, are deductible business expenses. Petitioner's post-trial brief, which is less than four pages in length, argues that the six expenditures "were used to pay those business expenses identified by the Taxpayer, including attorneys fees incurred in business litigation or services provided by the attorney in Taxpayer's business, American Medical Laser." We note that petitioner did not contest the following nine specific items, totaling $ 78,000, that respondent included in petitioner's gross income for 1988: DateDescriptionAmount1/25/88Check 005 from AML's acct. 17764 at Premier Bk.$ 15,0001/27/88Check 1295 from AML's acct. 17764 at Premier Bk.15,0005/09/88Withdrawal from AML's acct. 1777-2 at Premier Bk.1,0006/03/88Withdrawal from AML's acct. 1778-0 at Premier Bk.2,5007/18/88Transfer from First Nat. Bk. of Kennedale2,000(First Nat.) (SH Inv)7/19/88Transfer from 1000603, First Nat. (SH Inv)2,0008/25/88Transfer from 1000603, First Nat. (SH Inv)22,0008/29/88Transfer from 1000603, First Nat. (SH Inv)4,0008/30/88Check 44 from 1000603, First Nat. (SH Inv)14,500451 Accordingly, since petitioner has not challenged the inclusion of these items in his income, we sustain respondent's determinations as to each of them. The only items discussed by petitioner in his post-trial brief are the following: DateDescriptionAmount 1/20/88Check 017 from AML's acct. 17764 at Premier Bk.$ 5,0002/01/88Check 1306 from AML's acct. 17764 at Premier Bk.1,0002/03/88Check 1310 from AML's acct. 17764 at Premier Bk.3,2002/15/88Check 1340 from AML's acct. 17764 at Premier Bk.7,50011/09/88Deposit from 20438, client tr. acct. at Premier Bk.15,00010/03/88Petitioner's check payable to Fst. Nat. Bk.8,900 of KennendalePetitioner argues that the notations found on AML's check Nos. 1306 ("petty cash"), 1310 (" SWMS"), and 1340 ("payroll"), together with his "unchallenged testimony", prove that petitioner used those funds to pay deductible business expenses. In the case of check No. 1306 in the amount of $ 1,000, petitioner testified that the check was cashed and used for petty cash. In the case of check No. 1310 in the amount of $ 3,200, petitioner testified that the notation "SWMS" means South Western Medical School. Petitioner452 testified, in effect, that he took these funds from AML to purchase a cashier's check payable to South Western Medical School which was "involved in doing some research for us on the laser project." According to petitioner, he purchased a cashier's check: Because of the funds availability situation at the bank at that time. There was very limited amount of cash -- available funds in the bank. And we wanted to be sure the check cleared.In the case of check No. 1340 in the amount $ 7,500, petitioner testified that he used this money from AML in order to purchase cashier's checks to pay employees. We are not satisfied that petitioner has met his burden of proving respondent's determination wrong as to any of these three items. In order to find for petitioner, we would have to credit petitioner's testimony about the nature of each of these checks. At trial, we observed petitioner, and we found his testimony to be vague, self-serving, and incredible. For example, even if AML had been undergoing financial difficulties, we do not understand why AML could not have obtained certified checks directly from the bank to pay employees, rather than issuing a check for $ 7,500 to petitioner453 to obtain certified checks. The same is true of check No. 1310 in the amount of $ 3,200, which petitioner claims to have used to pay South Western Medical School. In any event, we are not bound to accept a taxpayer's uncontradicted testimony if we find it to be improbable, unreasonable, or questionable. Boyett v. Commissioner, 204 F.2d 205">204 F.2d 205, 208 (5th Cir. 1953), affg. a Memorandum Opinion of this Court; Schad v. Commissioner, 87 T.C. 609">87 T.C. 609, 620 (1986), affd. without published opinion 827 F.2d 774">827 F.2d 774 (11th Cir. 1987); Gallucci v. Commissioner, T.C. Memo 1992-435">T.C. Memo. 1992-435. The next items contested by petitioner are check No. 017 dated January 20, 1988, and the $ 15,000 deposit on November 7, 1988, to a client trust account maintained by petitioner's attorney. Respondent treated both of these items as income to petitioner. Petitioner's testimony concerning these items is as follows: Q Mr. Bellinger, the next check, please. Exhibit number, amount. A Exhibit C. Made out to myself in the amount of 5,000. Designated as fees. The countersigning on the back is, Pay to the order of454 John Covington. * * * Q Who is -- tell His Honor who John Covington is. A John is an attorney. Q You are aware of the fact that the Internal Revenue Service has disallowed approximately $ 21,000 of expenses that you paid to your lawyer, Mr. Covington? A That is correct. Q Please tell His Honor, in 1988, why were you paying Mr. Covington legal bills? A For representation in certain matters relating to not only this business, but also the other business ventures that I have been involved in. Q Well, let's be a little more specific. What type of business were you engaged in, which had created the litigation, which necessitated Mr. Covington's involvement? A The real estate ventures that I was involved in dating back to 1980. Q And, how were you involved in this litigation? As a plaintiff, defendant, or how? A Defendant. Q Were there any cross claims, counterclaims, etcetera? A Yes. Q All right. Fair statement that everybody is suing everybody else? A Correct. Q Okay. Who was the other -- who else was involved in that case? A Robert Walker. * * * * Q Okay. But it is a fair statement, these were paid to a lawyer to represent you in business litigation? A That is correct. 455 Q Okay. Did you have -- do you recall that you had any personal need for a lawyer, such as divorce, or buying a house, or selling a boat, or anything like that? A No. Q What is the next check? A Exhibit S. Q Okay. What is Exhibit S? A It is a deposit receipt into the GJB-JPC client trust account in the amount of 15,000. Q And is there anything on that check, any notation, or documentation which would allow you to tell His Honor the purpose for which that check was issued? A It was put into the John P. Covington client trust account. Q Again, that is the attorney? A Correct. Q And the date on that check is? A November 9, 1988. Q And is that -- does that check represent payment of fees to Mr. Covington to represent you in a matter you have already discussed with His Honor? A Fees related to matters, yes. Q Okay. Same as your prior testimony? A Correct.We find nothing in the above testimony to prove that the $ 5,000 check and the $ 15,000 deposit are not income to petitioner, as determined by respondent. To the contrary, petitioner's testimony suggests that these items, totaling $ 20,000, were a part of the legal fees of $ 21,000 that petitioner had deducted on his456 1988 return and that respondent disallowed in the notice of deficiency. Furthermore, we note that AML's check No. 017 in the amount of $ 5,000 was made payable to petitioner. The check was endorsed by petitioner and then also endorsed by Mr. John Covington, petitioner's attorney. If this check was in payment of Mr. Covington's legal services to AML, we do not understand why it was not drawn to Mr. Covington's order. The situation is the same with respect to the deposit of $ 15,000. As described above, the funds for this deposit came from a check in the amount $ 162,000 drawn by Key Financial Services, Inc., and made payable to AML. As described above, those funds were split into three client trust accounts maintained by Mr. Covington, and $ 15,000 was deposited into petitioner's client trust account. If any part of the $ 15,000 deposit was in payment of legal services provided by Mr. Covington to AML, we do not understand why such amount was not deposited into AML's custody account, rather than into petitioner's custody account. Therefore, we find that petitioner has failed to disprove respondent's determination that the subject items are included in petitioner's income for 1988, 457 and we hereby sustain respondent on that issue. Petitioner's principal contention with respect to AML's check No. 017 for $ 5,000 and the deposit to petitioner's client trust account in the amount of $ 15,000 is that such amounts are deductible under section 162. According to petitioner's testimony quoted above, these amounts were paid to his attorney, Mr. Covington, "for respresentation in certain matters relating to not only this business [i.e., AML], but also the other business ventures that I have been involved in." Petitioner describes "the other business ventures" as "real estate ventures * * dating back to 1980" and states that he was involved in "business litigation" as a defendant and that another person, "Robert Walker", was also involved in the litigation. We sustain respondent's determination disallowing petitioner's deduction of legal fees in the amount of $ 21,000. Petitioner has failed to prove that respondent's determination is wrong. First, as mentioned above, we do not credit petitioner's testimony. Second, even if we believed petitioner, his testimony is too vague to establish that either the $ 5,000 check or the $ 15,000 deposit is deductible under section 458 162. In this connection, we note that, according to petitioner's testimony, the two payments were given to Mr. Covington for legal services provided to AML and other legal services provided to petitioner. However, there is nothing in the record to show the amount of the legal services provided in connection with petitioner's trade or business. Petitioner is not entitled to deduct legal fees paid in furtherance of AML's trade or business. See Deputy v. Dupont, 308 U.S. 488">308 U.S. 488, 494 (1940); Leamy v. Commissioner, 85 T.C. 798">85 T.C. 798, 808-809 (1985). Thus, because there is nothing in the record to allocate the legal fees between the portion attributable to AML's business and the portion attributable to petitioner's business, we find that petitioner has failed to meet his burden of proving entitlement to the deduction. Furthermore, even if the legal fees could be allocated, petitioner's testimony is too vague to establish that any part of the expenditures is an ordinary and necessary business expense. All we can tell from petitioner's testimony is that the legal fees were paid in connection with petitioner's defense of certain "business459 litigation" involving petitioner's "real estate ventures * * * dating back to 1980." The nature of the litigation and the real estate ventures is not explained. We have no basis to judge the deductibility of the expenses. See generally United States v. Gilmore, 39">372 U.S. 39 (1963). Third, the testimony of petitioner's attorney, Mr. Covington, fails to substantiate petitioner's deduction of attorney's fees in the amount of $ 21,000. When asked if the deposit of $ 15,000 was in payment of legal services rendered for petitioner, Mr. Covington replied as follows: A Well, I wouldn't know if I performed legal fees with regard to this particular account, but I did an awful lot of work for them in 1988 and '89. And there for longer than a year, they provided an office over at their building, about a quarter of a floor where I was there 95 percent of the time. And I did a lot of legal work for them. A lot. Q And that was for Mr. Bellinger? A Well, it was for American Medical Laser, for Nutra-Meal, which originally was Whole Meal, then it was Total Meal, and then it was Nutra-Meal. Q But you did not provide any legal service for SH Investments? A Well, 460 I am assuming SH Investments has something to do with Steven Hibler, since that is his initials. And Steven Hibler, you know, he was one of the principals of the two companies, Nutra-Meal and AML. And I did as much or more work for him, at his direction, as I would Mr. Bellinger. So that -- I mean --Furthermore, when asked why a check made out to AML was deposited into three different trust accounts, Mr. Covington responded: A What are you saying -- this particular check went into -- these -- Q Yes. A -- that is the source? No. I can't -- I couldn't explain that. As I say, the only purpose that I ever recognized was that they had to have a place to cash their checks, and so that is what I did.Mr. Covington testified that he remembered "getting approximately $ 20,000 in fees from Gary right about that time." However, we note that Mr. Covington did not present records to substantiate his vague recollection that petitioner, as opposed to corporations with which he was affiliated, i.e., AML, Nutra Meal, Whole Meal, or Total Meal, paid legal fees of "approximately $ 20,000". Moreover, Mr. Covington was not asked to, and he did not, describe any of the legal services that461 he allegedly provided to petitioner. Accordingly, petitioner has failed to sustain his burden of proving entitlement to a deduction for any of the legal fees disallowed by respondent. The last item to which petitioner objects involves a check which petitioner drew from his account at the First National Bank of Kennedale dated October 3, 1988, in the amount of $ 8,900. Petitioner's argument is as follows: Exhibit T is a check in the amount of $ 8,900 and is payable to the First National Bank of Kennedale. The notations "CC" and "Dr. Heard payment" are contained thereon. Taxpayer testified that the check was used to obtain a cashier's check in a like amount to reimburse Dr. Heard for lease payments he had made. The Taxpayer testified that the lease payments were in furtherance of the business of American Medical Laser.If the purpose of the above argument is to reduce the amount of unreported income determined by respondent, it fails because respondent did not include the subject expenditure of $ 8,900 among the specific income items used to reconstruct petitioner's 1988 income. If the purpose of the above argument is to persuade the Court to allow a deduction under section 462 162 in the amount of $ 8,900, it fails because we do not credit petitioner's testimony concerning the nature of the expenditure and it is not otherwise substantiated. Addition to Tax for Negligence Under Section 6653 (a)Respondent determined that petitioner is liable for an addition to tax for negligence pursuant to section 6653(a)(1). Section 6653(a)(1) imposes an addition to tax equal to 5 percent of the underpayment, if any part of the underpayment for the year is due to a taxpayer's negligence or disregard of rules or regulations. For this purpose, the term "negligence" is defined as the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Hitchins v. Commissioner, 103 T.C. 711">103 T.C. 711, 719 (1994). Petitioner bears the burden of proving that no part of the underpayment for 1988 was due to his negligence or disregard of rules or regulations. Rule 142(a); Axelrod v. Commissioner, 56 T.C. 248">56 T.C. 248, 258-259 (1971). In this case, petitioner has made no attempt to prove that he exercised the requisite level of care. He presented no defense to respondent's determination463 of negligence at trial or on brief. Accordingly, we find that petitioner has failed to meet his burden of proof on this issue and is liable for the addition to tax pursuant to section 6653(a). Addition to Tax Under Section 6661(a) --Substantial Understatement of Tax LiabilityRespondent's notice of deficiency determined that petitioner is liable for the addition to tax under section 6661. Section 6661(a) provides that if there is a substantial understatement of income tax on a taxpayer's Federal income tax return, then there shall be added to the tax an amount equal to 25 percent of the amount of any underpayment attributable to such understatement. See generally Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498, 503 (1988). For this purpose, the term "understatement" means the excess of the amount of tax required to be shown on the return for the taxable year over the amount of tax imposed which is shown on the return, reduced by any rebate. Sec. 6661(b)(2)(A). Generally, the amount of the understatement is reduced by the portion attributable to an item for which there is or was substantial authority for the taxpayer's treatment of the item, or an item*464 with respect to which the relevant facts are adequately disclosed on the return. Sec. 6661(b)(2)(B). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1)(A). The statute provides that the Secretary may waive all or part of the addition to tax if the taxpayer shows that there was reasonable cause for the understatement and that the taxpayer acted in good faith. Sec. 6661(c). In this case, as discussed above, we disagree with petitioner's position that there is no understatement with respect to his 1988 return. Petitioner did not otherwise take issue with respondent's determination that petitioner is liable for the addition to tax under section 6661(a). Accordingly, petitioner has not met his burden of disproving respondent's determination as to the addition to tax under section 6661(a), and we hereby sustain respondent as to that issue. To reflect the foregoing, Decision will be entered for respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620872/	Nelson C. Elam and Adele B. Elam, Petitioners v. Commissioner of Internal Revenue, RespondentElam v. CommissionerDocket No. 2861-70United States Tax Court58 T.C. 238; 1972 U.S. Tax Ct. LEXIS 131; May 8, 1972, Filed 131 Decision will be entered under Rule 50. Held: Petitioners must recognize gain on the sale of their former principal residence to the extent that the adjusted sales price exceeds the cost of purchasing new property and the existing improvements thereon plus the cost of erecting a guesthouse, which petitioners completed and used as a principal residence within 18 months after the sale. Sec. 1034(a) and (c)( 5), I.R.C. 1954. No part of the cost of building the main house on the property may be offset against such adjusted sales price because the main house was not used as a principal residence within the 18-month period. William Waller and William E. Martin, for the petitioners.Jack D. Yarbrough, for the respondent. Tietjens, Judge. TIETJENS238 The Commissioner determined a deficiency of $ 11,328.49 in the income tax of petitioners for the calendar year 1966, which results from his increasing gross income by the amount of gain petitioners realized on the sale of their former principal residence. The sole issue is whether section 1034, I.R.C. 1954, 1 requires nonrecognition of part of the gain and to what extent if any the purchase price of a new residence and the costs petitioners incurred in constructing a new dwelling house should be taken into account in computing the amount of133 gain currently taxable.FINDINGS OF FACTNelson C. Elam and his wife, Adele B. Elam, filed a joint return for the taxable year with the district director of internal revenue at Nashville, Tenn. At the time of the filing of the petition they resided in Franklin, Tenn.On August 3, 1966, they sold a 110-acre farm where they had made their home since 1941. One-third of the sales price, $ 93,333.33, is allocable to their personal residence there, which included 17 surrounding acres. The gain attributable to the one-third is $ 45,314. Petitioners purchased new property earlier on March 3, 1966, on which they planned to make their new home. They continued to live in the old residence for 6 months after it was sold, the first 4 months rent-free by prior arrangement with the buyer.Petitioners planned to build a guesthouse as well as a main dwelling house on the new property. Construction of the guesthouse was begun in October134 1966 and carried out on an expedited basis so that they could quit their former residence at the earliest date. The guesthouse239 was completed in February 1967 and petitioners moved into it at that time. Some of the furnishings from the old residence could not be accommodated by the guesthouse, and the overflow was stored in a cabin on the new property until the move into the main house could be made.Petitioners next turned their attention to the main house, which was begun in October 1966 and not completed and occupied until August 1, 1968, nearly 24 months after the sale of the former residence.By February 1, 1968, petitioners had incurred the following costs in connection with the purchase of the new property and appurtenances and in connection with the construction of the main house and guesthouse:Allocable land costs$ 3,196.42Guesthouse19,373.22Outbuildings2,103.29Main house (incomplete)58,603.8483,276.77Petitioners declared no part of the gain on the sale of their prior residence in their return for the 1966 taxable year but they now concede that at least $ 10,056.56 of the gain, being the difference between the amount realized and $ 83,276.77, 135 is reportable.OPINIONSection 1034(a) may require nonrecognition of part or all of the gain realized on the sale of the taxpayer's principal residence if the taxpayer purchases, under statutory time limitations, a new principal residence. Section 1034(c)(2) makes clear that the new principal residence does not have to be an existing structure at the time of the sale of the old residence, and section 1034(c)(5) allows 18 months from the date of sale for the construction of the new residence provided that work is started before the expiration of 1 year after that date. Petitioners began construction on the main house early enough, and thus the question remains what constituted their principal residence in early February 1967, 18 months after the sale of their prior residence.On brief the parties share the view that the guesthouse, the main house, the outbuilding, the parcel on which they were situate, and any other appurtenances constituting real property should be taken together as constituting petitioners' new principal residence. On that basis the petitioners contend that as they occupied the guesthouse within the 18-month period they are entitled to nonrecognition treatment136 with respect to all the real estate involved, and that the construction costs of the main house that are chargeable to capital account and that were incurred prior to February 1967 are includable 240 in the "cost of purchasing the new residence" for purposes of section 1034(a). The Commissioner draws the opposite conclusion, that since the main house was still under construction in February 1967 the functional unit of the main house, guesthouse, etc., could not be deemed to have been put into use as a residence by that time, and consequently that petitioners must recognize the full amount of the gain realized on the sale of their old residence. However, the Commissioner adverts to the possibility that the guesthouse only, which petitioners were occupying at the end of the 18-month deadline, constituted a new principal residence.We agree with the view last expressed, and hold that petitioners must recognize gain on the sale of their old residence only to the extent that the proceeds thereof (as defined by section 1034(b)) exceed the purchase price of the new property plus any construction or improvement costs other than the cost of the main house.Section 1034 manifestly is137 not designed to require the offsetting of the adjusted sales price of the old residence by the construction costs of the new residence regardless of the time incurred, which could be perhaps several years after the date of sale. Rather, the plan of the statute is to accord tax deferral only if the proceeds of sale can be reinvested in the new residence within a relatively short period of time -- generally 1 year. Congress has provided an additional 6-month grace period if the taxpayer builds or reconstructs the new residence.The cases further tell us that the event we are to look for during the relevant period is the placing of the new residence into use as a residence. John F. Bayley, 35 T.C. 288">35 T.C. 288, 295 (1960); United States v. Sheahan, 383">323 F. 2d 383 (C.A. 5, 1963); William C. Stolk, 40 T.C. 345">40 T.C. 345 (1963), affirmed per curiam 326 F. 2d 760 (C.A. 2, 1964). The statute provides the additional precision that if more than one residence is purchased, the one last used as a principal residence during the period is deemed the statutory new residence. Sec. 1034(c)(4)138 and (5). The facts reveal that petitioners were using the guesthouse as a residence by February 1967. Whether or not the main house would have constituted a second principal residence had it been completed and occupied by that date is a question we do not have to decide today.Petitioners make much of the statement in the legislative proceedings that the term "residence" includes "the environs and outbuildings relating to the dwelling." 2 As we have adumbrated above, they suggest that the uncompleted main house must be considered part of the residence and that the costs that went into constructing it by the end of the 18-month period should be counted toward the nonrecognition of gain.241 The legislative statement must be placed in the context of the residential-use requirement found repeatedly in the language of section 1034. It says only that outbuildings and servient structures, indeed139 the unimproved land constituting the parcel on which a dwelling house is situate, may be classified logically and functionally as part of a taxpayer's residence. However, the petitioners' main house possessed no residential utility before the time the statutory period expired. In this case the facts show that the new main house residence was simply not put into use as a residence before the prescribed time limit. It is of no avail that the main house later achieved its intended use as the dominant structure of the residence.Decision will be entered under Rule 50. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise stated.↩2. Joint Committee Staff Summary of Provisions of the Revenue Act of 1951, 2 C.B. 310">1951-2 C.B. 310↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620874/	JUNIEL BUTLER, Petitioner v COMMISSIONER OF INTERNAL REVENUE, RespondentButler v. CommissionerDocket No. 17882-89United States Tax CourtT.C. Memo 1991-40; 1991 Tax Ct. Memo LEXIS 59; 61 T.C.M. (CCH) 1767; T.C.M. (RIA) 91040; February 4, 1991, Filed 59 Decision will be entered for respondent as to the deficiency and the addition to tax under section 6651(a)(1) and for the petitioner with respect to the additions to tax under sections 6653(a) and 6661. Juniel Butler, pro se. William D. Reese, for the respondent. COHEN, Judge. COHENMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined a deficiency of $ 31,147 in petitioner's Federal income tax for 1984 and additions to tax under sections 6651(a)(1), 6653(a)(1) and (a)(2), and 6661. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the year in issue. Respondent has now conceded that petitioner is not liable for the additions to tax under sections 6653(a) or 6661. The issue for decision is whether petitioner is entitled to relief under section 66(c) from tax liability on gain on the sale of certain real property. FINDINGS OF FACT Petitioner was a resident of California at the time that she filed her petition. On April 1, 1968, petitioner married Edward D. Butler. In March 1982, petitioner and Mr. Butler separated, and petitioner filed a dissolution proceeding, docket No. 503572, in the Superior60 Court for the State of California, County of Santa Clara (the dissolution action). On or about January 13, 1977, Mr. Butler purchased business real estate located at 3395 Woodward Avenue, Santa Clara, California (the Woodward property), for $ 220,000. The property was conveyed by the seller to "Edward D. Butler, a married man." On the same date, petitioner executed an Individual Quitclaim Deed by which she, as "wife of the Grantee * * * hereby Remise(s), Release(s) and Forever Quitclaim(s) to Edward D. Butler, a married man, as his sole as [sic] separate property" the Woodward property. The quitclaim deed was recorded sequentially with the deed by which Mr. Butler acquired title to the Woodward property. Throughout the marriage of petitioner and Mr. Butler, Mr. Butler controlled the assets of the parties and treated the Woodward property as his own. Petitioner frequently signed documents at the demand of Mr. Butler. With her petition in the dissolution action, petitioner filed a property declaration claiming the Woodward property as community property. Mr. Butler claimed that petitioner had signed a prenuptial agreement, under which property acquired by either spouse during61 their marriage would be the separate property of that spouse. On October 19, 1984, the Superior Court in the dissolution action found that petitioner did not sign the alleged prenuptial agreement. The Superior Court ruled that all of the assets of the parties, including the business and the real estate of the parties, were community property. In August 1982, petitioner's attorney in the dissolution action received an appraisal valuing the Woodward property at $ 520,000. On March 14, 1984, Mr. Butler sold the Woodward property for $ 533,000. Petitioner's attorney in the dissolution action learned of the sale of the Woodward property prior to July 24, 1984. On November 19, 1984, petitioner and Mr. Butler stipulated in open court to terms of settlement of the dissolution action. The settlement was reduced to judgment entered March 29, 1985. Mr. Butler was ordered to pay to petitioner the sum of $ 200,000, with $ 75,000 payable immediately and the balance in installments commencing January 2, 1985. Petitioner was also awarded the family residence and an automobile. Mr. Butler failed to pay the $ 125,000 balance due to petitioner in accordance with the judgment and had not paid62 that amount as of the trial of this case on October 24, 1990. Mr. Butler reported only one-half of the proceeds of sale and gain attributable to the sale of the Woodward property on his separate 1984 Federal income tax return. Petitioner did not report the sale on her 1984 Federal income tax return. Petitioner received an extension to August 15, 1985, for filing her 1984 return. Petitioner's Federal income tax return was filed on August 25, 1985. In separate notices of deficiency, respondent determined that Mr. Butler was liable for tax on the full amount of the gain and that Mrs. Butler was liable for tax on one-half of the gain from sale of the Woodward property. Separate petitions were filed with respect to the notices of deficiency, and the cases were consolidated for trial. OPINION Immediately prior to trial of this case, a settlement was reached between respondent and Mr. Butler with respect to his tax liability arising from the sale of the Woodward property. Without notifying petitioner, respondent released Mr. Butler from appearing pursuant to a subpoena for trial. Mrs. Butler testified that, even after the California court had ruled that the Woodward property was63 community property, Mr. Butler always treated it as his own. She further testified that Mr. Butler used threats and actions to coerce or intimidate her into signing certain documents; that she never received the full amount awarded to her under the divorce settlement; and that, at the time of the settlement, the Woodward property was considered to be a part of Mr. Butler's business. This testimony is credible, uncontradicted, and unimpeached, and we accept it as true. Unfortunately, however, the determination of the California court that the Woodward property was community property leads to the conclusion that petitioner is taxable on one-half of the gain on sale of that property, whether or not she actually received anything from the sale. See, e.g., Kimes v. Commissioner, 55 T.C. 774">55 T.C. 774, 778-782 (1971). Relief in some circumstances is provided by section 66(c) as follows: (c) Spouse Relieved of Liability in Certain Other Cases. -- Under regulations prescribed by the Secretary, if -- (1) an individual does not file a joint return for any taxable year, (2) such individual does not include in gross income for such taxable year an item of community64 income properly includible therein which, in accordance with the rules contained in section 879(a), would be treated as the income of the other spouse, (3) the individual establishes that he or she did not know of, and had no reason to know of, such item of community income, and (4) taking into account all facts and circumstances, it is inequitable to include such item of community income in such individual's gross income,then, for purposes of this title, such item of community income shall be included in the gross income of the other spouse (and not in the gross income of the individual). (d) Definitions. -- For purposes of this section -- (1) Earned income. -- The term "earned income" has the meaning given to such term by section 911(b) [now 911(d)(2)]. (2) Community income. -- The term "community income" means income which, under applicable community laws, is treated as community income. (3) Community property laws. -- The term "community property laws" means the community property laws of a State, a foreign country, or a possession of the United States. Section 879(a), referred to in section 66(c)(2), states that community income other 65 than earned income, trade or business income, or income derived from separate property of a spouse, "shall be treated as provided in applicable community property law." Gain from sale of the Woodward property cannot be characterized as earned income, trade or business income, or income derived from separate property. Respondent contends that petitioner is not eligible for relief under section 66(c) because, under section 879(a), gain on sale of community property would not be treated as the income of Mr. Butler and because petitioner knew of the income and, according to respondent, received a benefit in the form of the payments ordered by the Superior Court. Although the evidence contradicts, rather than supports, the claim that petitioner received a benefit from sale of the Woodward property, the evidence requires the conclusion that petitioner knew of the sale prior to settlement of the dissolution action and prior to the time that she filed her Federal income tax return for 1984. In any event, as a matter of California law, neither section 879(a) nor 66(c)(2) allows us to treat more than one-half of the income from sale of the Woodward property as income of Mr. Butler. Thus 66 petitioner is not entitled to relief under section 66(c). She has not established reasonable cause for late filing of her 1984 return, and the addition to tax under section 6651(a)(1) must be sustained. Because of respondent's concession, Decision will be entered for respondent as to the deficiency and the addition to tax under section 6651(a)(1) and for the petitioner with respect to the additions to tax under sections 6653(a) and 6661.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620875/	IRA A. EDENS and VELTA JANE EDENS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEDENS v. COMMISSIONERDocket No. 3812-70.United States Tax CourtT.C. Memo 1974-309; 1974 Tax Ct. Memo LEXIS 9; 33 T.C.M. (CCH) 1419; T.C.M. (RIA) 740309; December 16, 1974, Filed. 9 Held: Petitioners had a reasonable prospect of recovery with regard to an alleged casualty loss to their house in 1962. They are not entitled to a casualty loss deduction in 1962 since they have failed to establish that they abandoned their claim during that year. Held: Respondent is not estopped from adjusting the amounts claimed by petitioners as net operating loss carrybacks and carryforwards. Held: Petitioners are not entitled to a deduction in 1962 for home insurance that related to that portion of their home that served as a personal residence. Held: Petitioners are not entitled to a deduction in 1965 in the amount of $811.93 for automobile expenses. Held: Petitioners are not entitled to a deduction in 1966 in the amount of $3,719.40 for business expenses of petitioner Velta Jane Edens. Held: Petitioners are liable for the addition to tax pursuant to section 6651(a). Ira A. Edens, pro se. Dudley W. Taylor, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: The respondent determined deficiencies in petitioners' Federal11 income tax and additions to tax as follows: YearDeficiencyAdditions to Tax Sec. 6651(a), I.R.C. 19541961$ 438.29$145.521962270.1067.5719631,007.18251.80196559.67-1966383.05-The only issues remaining for decision are: 1. Whether petitioners are entitled to a casualty loss deduction relating to alleged damage to their house in 1962. 2. Whether respondent is estopped from adjusting the amounts claimed by petitioners as net operating loss carrybacks and carryforwards. 3. Whether petitioners are entitled to a deduction in 1962 for home insurance that related to that portion of their home that served as a personal residence. 4.Whether petitioners are entitled to a deduction in 1965 in the amount of $811.93 for automobile expenses. 5. Whether petitioners are entitled to a deduction in 1966 in the amount of $3,719.40 for business expenses of petitioner Velta Jane Edens. 6. Whether petitioners are liable for the addition to tax pursuant to section 6651(a). FINDINGS OF FACT Some of the facts have been stipulated and have been found accordingly. Petitioners are Ira A. Edens and Velta Jane Edens, husband12 and wife, who resided in Columbia, South Carolina, at the time of the filing of the petition herein. They filed joint Federal income tax returns for the taxable years 1961 through 1966 with the district director of internal revenue in Columbia, South Carolina. In 1956 Ira A. Edens (hereinafter referred to as Ira) entered into the business of conducting an insurance adjusting agency and claim service. Ira conducted this business as a sole proprietorship until he terminated it upon entering law school in 1965. After entering the insurance adjusting business, Ira used the dining room area of his house as office space. At this time petitioner's house had seven rooms. Later petitioner built an office out of a portion of what had been the garage. Another portion of the garage was used as filing space for Ira.Petitioners claimed two-sevenths of the cost of maintaining the residence as a business expense of Ira on their tax returns for the years in issue. Furthermore, in 1962 petitioners claimed the remaining five-sevenths of the amounts spent for interest, taxes and insurance relating to their home as a nonbusiness or itemized deduction. The home in which petitioners resided during13 the years in issue was purchased in 1958 at a cost of $19,000. During the month of October 1962, the Kahn-Jackson Construction Company was in the vicinity of petitioners' residence installing a sewer line. While excavating for the sewer line, Kahn-Jackson utilized dynamite to break up large deposits of rock and allow excavation of the sewer trench. Sometime thereafter petitioners reported to Kahn-Jackson that they had observed cracks in the walls of their house within a few days after the blasting operations were completed. After one of its engineers had inspected the house, Kahn-Jackson denied liability for the alleged damage. Petitioners also reported the alleged damage to Southern Home Insurance Company, with whom they carried insurance on their residence. After inspection by one of their representatives, the insurance company denied liability. Petitioners retained counsel who brought suit against the insurance company. This suit has been on a trial roster in a court in Lexington County, South Carolina, for more than ten or twelve terms. Petitioners were preparing to try this case against the insurance company in November 1971, and at that time expected it to be tried. 14 On their amended 1962 tax return, petitioners claimed a deduction for a casualty loss to their residence in the amount of $4,495.50. Velta Jane Edens worked as a private-duty nurse during the years in issue. She obtained her employment by telephone at her residence from the private-duty register. During the years in issue, including 1965 and 1966, she received her nursing assignments by telephone at home and traveled directly to and from her home to the location of the patient. She did not travel to the register or to any one employer. Petitioners claimed business expense deductions in the amounts of $1,237.81 and $3,719.40 on their 1965 and 1966 tax returns relating to Velta's occupation as a private-duty nurse. Petitioners claimed net operating loss carryovers in the amounts of $494.20 and $3,000.92 from the years 1957 and 1958, respectively, on their 1961 tax return. Petitioners claimed net operating loss carryovers from 1959 on their 1962 and 1963 returns, each in the amount of $1,546.12. Petitioners claimed a net operating loss carryover from 1965 in the amount of $703.37 on their 1966 tax return. Ira filed his Federal income tax return for 1956 as a married taxpayer15 filing separately. Ira and Velta filed joint returns for the years 1957 through 1966. OPINION The first issue is whether petitioners are entitled to a casualty loss in 1962 for alleged damage that occurred to the walls of their residence. Respondent contends that no casualty loss is allowable in 1962 since by having filed suit against the insurer of their house in that year they had a reasonable claim for reimbursement so that if any loss was sustained it was not sustained in 1962. Respondent further contends that petitioners have failed to show that the damage to their house resulted from a casualty and, alternatively, that petitioners have failed to prove the amount of their loss, if any, from the alleged damage. Section 165(a)1 provides a deduction for losses not compensated for by insurance or otherwise. In the case of individuals a loss of property which is not used in a trade or business or not held for the production of income is deductible if it meets the conditions of section 165(c) (3). That section permits a deduction if the loss arises from fire, storm, shipwreck or16 other casualty, or from theft. Section 1.165-1(d), Income Tax Regs., provides that a loss shall be allowed as a deduction under section 165(a) only for the taxable year in which the loss is sustained. Section 1.165-1(d) (2) (i), Income Tax Regs., states that: If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. * * When a taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the execution of a release. 17 Because petitioners brought suit, apparently in good faith, against the insurance company in 1962, we conclude that petitioners had a claim for reimbursement with respect to which there was a reasonable prospect of recovery. Louis Gale, 41 T.C. 269">41 T.C. 269 (1963). Petitioners have failed to produce objective evidence of having abandoned this claim during the year 1962. Furthermore, in 1971 petitioners filed a document with this Court in which they stated that they were presently preparing for trial in a civil action for damages against the insurance company. This document is positive evidence that petitioners did not abandon their claim in 1962, the year in which they claimed the casualty loss. Accordingly, we hold that petitioners have failed to establish that they did not have a reasonable prospect of recovery in 1962 and thus have failed to show that they sustained a loss in that year. Assuming arguendo that petitioners had abandoned their claim in 1962, we conclude that petitioners have failed to establish that the alleged damage to their house was the result of the blasting operations.The only evidence that petitioners produced in this regard was the testimony of18 an expert witness who first examined the house in 1974. He testified that the cracks and damage that he observed in the Edens' residence were typical of those which result from blasting operations nearby. He admitted, however, that his inspection of the house was rather superficial and that he had not observed the foundation of the house below the ground level. We conclude that the expert testimony is inadequate to support petitioners' burden of proving that the cracks in the house were caused by blasting rather than by gradual settling or by poor construction of the house. Furthermore, petitioners have failed to prove the amount of damages that were sustained as a result of the alleged casualty. The petitioners attempted to prove damages by relying on the testimony of their expert. The petitioners failed, however, to show that their expert was a qualified real estate appraiser. Moreover, the expert testified that he did not have expertise in making appraisals of what it costs to repair houses. We conclude that petitioners have failed to offer any evidence that would provide a basis for determination of an amount of damages. The next issue is whether the respondent is estopped19 from adjusting the amounts claimed by petitioners as net operating loss carrybacks and carryforwards in accordance with section 172. The respondent disallowed net operating loss deductions claimed by the petitioners because of his determination that no net operating losses were sustained in 1957 and 1965 and that the net operating losses actually sustained in 1958 and 1959 were absorbed in 1957. The primary reason behind the adjustment to the amounts claimed as net operating losses by the petitioners is that petitioners failed to offset the operating loss from Ira's insurance adjustment business against the nursing income received by Velta and additional income realized by Ira as wages from the United States Air Force Reserve. Petitioners do not contest the computation of the correct net operating loss deductions as shown in the statutory notice. Petitioners, however, have alleged that respondent is estopped from correcting petitioners' method of computing net operating losses because of "a good faith reliance" by them. The petitioners' first theory is that several years ago Ira sought specific help from the Internal Revenue Service in preparaing his tax return, and that the20 advice given was subsequently followed faithfully be petitioners in computing the net operating losses shown on their returns. The doctrine of equitable estoppel has been applied on occasions when fraud or unfair conduct on the part of the Commissioner's representatives has been shown along with reliance thereon by the taxpayer to the latter's detriment. Schuster v. Commissioner, 312 F.2d 311">312 F.2d 311 (C.A. 9, 1962). The doctrine of equitable estoppel is not a bar to the correction by the Commissioner of a mistake of law in the absence of unfair conduct. Automobile Club of Michigan v. Commissioner, 353 U.S. 180">353 U.S. 180 (1957). The petitioners have failed to show that the information given them by respondent's representatives was incorrect with regard to the year to which that information related. It appears that the information given to petitioner Ira was correct with regard to a married taxpayer filing separately as was the case with Ira in the year 1956. Furthermore, even if that information was incorrect it related to the requirements of section 172 and accordingly must21 be classified as representing a mistake of law rather than a mistake of fact. John S. Neri, 54 T.C. 767">54 T.C. 767 (1970). Petitioners' second theory is that respondent is estopped from correcting petitioners' method of computing net operating losses because of the acceptance of earlier filed returns utilizing the same incorrect method. It is well established that the acceptance of prior returns does not create estoppel as to later years. Barry Meneguzzo, 43 T.C. 824">43 T.C. 824 (1965); South Chester Tube Co., 14 T.C. 1229">14 T.C. 1229 (1950). Accordingly, we hold that the respondent is not estopped from adjusting the amounts claimed by petitioners as net operating loss carrybacks and carryforwards. The next issue is whether petitioners are entitled to a deduction in 1962 in the amount of $98.57 representing a portion of the insurance premiums on petitioners' residence. On their 1962 tax return, petitioners deducted two-sevenths of the insurance premium on their residence as a business deduction and five-sevenths of the premium as an itemized deduction. The respondent determined that $98.57 of the insurance premium related to insurance of that portion of petitioners' residence22 that served as their personal residence. Petitioners offered no evidence to dispute respondent's determination. Accordingly, the deduction by petitioners of insurance premiums in the amount of $98.57 is disallowed because it is not applicable to business use but rather represents a personal expense. Section 1.262-1(b) (2), Income Tax Regs.We next must decide whether petitioners are entitled to a deduction in 1965 for automobile expenses in the amount of $811.93. These expenses were incurred by Velta in her capacity as a private-duty nurse for transportation from her home to the location of her patients. She received her assignments and her cancellations by telephone at her residence. The record does not establish that any of her transportation expenses were other than personal commuting expenses which are not deductible. Ewell L. Teer, T.C. Memo 1964-80">T.C. Memo. 1964-80. The next issue is whether petitioners are entitled to a deduction in 1966 in the amount of $3,719.40 for business expenses of Velta. Petitioners have listed these expenses in three categories. The first category of business expense claimed was automobile expenses. The record does23 not establish these expenses were incurred for any purpose other than personal commuting which expenses are not deductible. Ewell L. Teer, supra.The second category of items were allegedly office expenses relating to Ira's former insurance adjustment office. The petitioners have produced no evidence to establish that any of these alleged expenses related to Velta's employment as a private-duty nurse.The third category of items relate to the alleged maintenance of an office space in petitioners' residence. The office space in the house was apparently set aside in prior years when Ira was in the insurance adjustment business. The record fails to establish that Velta in her capacity as a private-duty nurse was required to maintain an office in be home in 1966.The only items for which we could possible allow a deduction as a business expense of Velta in 1966 are telephone expenses to the extent that they related to patient assignments and cancellations. Petitioners have failed, however, to provide the Court with any basis for allocating their telephone expenses between business use and personal use. Accordingly, we hold that petitioners are not entitled to the deduction24 of $3,719.40 claimed in 1966. The final issue is whether petitioners are liable for the addition to tax pursuant to section 6651(a). The burden of proof on this issue is upon petitioners. Estate of Ralph B. Campbell, 56 T.C. 1">56 T.C. 1 (1971). We find that petitioners have failed to meet their burden of proof and therefore hold for respondent on this issue. Decision will be entered for the respondent. Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect during the tax years in issue, unless otherwise indicated. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620876/	JAMES A. KERR, JR. AND ERIKA S. KERR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentKerr v. CommissionerDocket No. 31392-86United States Tax CourtT.C. Memo 1990-155; 1990 Tax Ct. Memo LEXIS 179; 59 T.C.M. (CCH) 193; T.C.M. (RIA) 90155; March 22, 1990James A. Kerr, Jr., pro se. Jose A. Bonau, for the respondent. PARR347 MEMORANDUM FINDINGS OF FACT AND OPINION PARR, Judge: Respondent determined deficiencies and additions to tax against petitioners as follows: 182 348 Additions To Tax YearDeficiency1Section 6653(b) or (b)(1) Section 6653(b)(2)Section 66611981$ 41,873.94$ 22,197.97NA-0- 1982$ 11,292.62$ 5,646.31 $ 1,129.26Respondent concedes the additions to tax for fraud but contends, pursuant to his amended answer, that petitioners are liable for additions to tax under section 6651(a)(1) for 1981, additions to tax under 6653(a)(1) for 1981 and 1982, and additions to tax under 6653(a)(2) for 1981 and 1982. Respondent bears the burden of proof regarding the delinquency and negligence additions. Rule 142(a). After mutual concessions, the issues for decision are whether petitioners' (1) YMCI stock basis, for computing their long-term capital gain, was $ 111,000.00; (2) are entitled to $ 11,235.90 and $ 9,505.75 unreimbursed183 employee business expense deductions in 1981 and 1982, respectively; (3) are liable for additions to tax under sections 6651(a)(1), 6653(a)(1) and (a)(2), and 6661(a). FINDINGS OF FACT Some of the facts have been stipulated and are incorporated herein by this reference. At the time petitioners filed their petition in this case they resided in Dallas, Texas. During the years in issue, petitioners resided in Jackson, Mississippi. Petitioners filed joint individual Federal income tax returns for calendar years 1981 and 1982 with the Internal Revenue Service Center, Atlanta, Georgia. Timeliness of FilingPetitioner James A. Kerr, Jr. (hereinafter, "petitioner") personally prepared and hand wrote the joint 1981 and 1982 tax returns. On their 1981 joint Federal income tax return petitioners claimed an $ 18,418.09 refund. There appears, on the signature line of the second page of the return, the date "April 15, 1982" indicating the date petitioners signed such return. The return was due to be filed on or before April 15, 1982. Sec. 6072(a). The face of the return is stamped "RECEIVED MAY 20 1982 ATSC IRS #100". On the bottom of the first page of the return is noted, 184 "POSTMARKED DATE MAY 17 1982". Respondent determined, in his amended answer, that petitioners are liable for a ten-percent addition to tax pursuant to section 6651(a)(1) as the result of their failure to timely file their 1981 tax return. Stock BasisPetitioner's father, James A. Kerr, Sr. (Kerr, Sr.), began a family business, Kerr Tire and Rubber Company, sometime between 1942 and 1943. The business developed into several separate companies and divisions including, but not limited to, Yazoo Manufacturing Company, Inc. (YMCI), Yazoo Sales Company (YSC), Yazoo Sales Eastern Division 2 (YSED), Kerr Enterprises, Inc. (KEI), Master Sales Company, Inc., Auto Electric and Carburetor, and Yazoo of Texas. Although petitioner worked in the Yazoo family business from the time he was a young child until he graduated from high school, he never received any compensation therefor. It was not until he graduated from the United States Air Force Academy in 1960 that petitioner first learned that he owned ten shares of $ 100.00 par value YMCI stock. The 10 shares had been transferred from Madge185 Luckett (Mrs. Luckett), an employee of YMCI, to petitioner on September 7, 1960. Mrs. Luckett had originally acquired the ten shares of stock from YMCI on November 1, 1950. Since the stock was purchased directly from Mrs. Luckett, a shareholder, YMCI has no records of the amount, if any, that either petitioner or his father paid to acquire them. The only record YMCI has pertaining to the above transaction is Mrs. Luckett's original cancelled stock certificate, number 9, and the original stock certificate, number 14, YMCI issued on May 31, 1966 in petitioner's name. From June 1960 until 1965, petitioner was commissioned in the Marine Corps. After he resigned his commission in 1965, petitioner obtained his master's degree from the University of Pennsylvania, Wharton School of Business. While attending Wharton, petitioner was employed with YSED and received between $ 8,000.00 and $ 10,000.00 in wages. Petitioner graduated from Wharton in June 1966 and returned to Jackson, Mississippi, to work in the Yazoo family business. Between November 6, 1967 and December 31, 1968, petitioner acquired the following shares of stock:(1) November 6, 1967: 2500 shares of Yazoo of Texas, 186 zero par value, stock; 349 (2) January 8, 1968: 10,400 shares of YSED's, $ 1.00 par value, common stock; (3) February 28, 1968: 1300 shares of Yazoo of Texas stock. (4) October 31, 1968: 1 share of Master Sales company zero par value, stock; (5) December 31, 1968: 5 shares of KEI stock, $ 100.00 par value, transferred from Kerr, Sr. 3KEI has no record of the amount, if any, petitioner paid for the 5 shares of stock since the transfer was made by a shareholder and not by the corporation.Kerr, Sr. died on August 18, 1969, and, petitioner and other family members, assumed the responsibility of running all Yazoo related businesses. Petitioner's uncle, O. H. Kerr, was President of YMCI and petitioner's mother, although hospitalized and inactive, was the majority shareholder. Petitioner did not acquire any of the shares here in issue as the result of a transfer from his father's estate. On December 31, 1972, pursuant to a plan of reorganization, YSC merged into YMCI. At the time of the merger, petitioner did not187 own any YSC stock and did not receive any YMCI stock as a result of the merger. Before December 1974, a plan of reorganization was instituted to combine all Yazoo related companies and create one large company, YMCI. Pursuant to said plan the following occurred: (1) June 11, 1974, Yazoo of Texas Inc. redeemed petitioner's 3,800 shares for $ 7,600.00; (2) April 26, 1974 petitioner transferred to YMCI his only share of Master Sales Company, Inc. stock and, on February 27, 1975, received $ 275.82 in return; and (3) February 27, 1975, KEI purchased petitioner's only share of Auto Electric & Carburetor, Inc. for $ 415.36. After the above redemptions and purchase transactions occurred, petitioner's total stock holding in Yazoo's remaining related companies consisted of five shares of KEI stock and ten shares of YMCI stock. On March 27, 1975, the shareholders and directors of KEI held a special joint meeting to consider the proposed merger of KEI, YMCI and Yazoo of Louisiana, Inc. into KEI. The board of directors unanimously adopted the plan and the shareholders unanimously approved the plan. On June 25, 1975 and in accordance with the plan of reorganization, YMCI merged into KEI188 and petitioner received 22 shares of KEI stock in exchange for his ten shares of YMCI stock plus $ 200.00 4 in cash. After the June 25th transaction, petitioner owned a total of 27 shares of KEI stock consisting of the 22 shares just received plus the 5 shares he acquired from his father on December 31, 1968. On July 1, 1975, KEI shareholders unanimously adopted the resolution that the name of KEI be changed to YMCI and that the authorized capital of the corporation be increased to $ 500,000.00. As the final step in the plan of reorganization, petitioner surrendered his 27 shares of KEI to YMCI and on October 7, 1975, YMCI, the only company remaining after the merger or reorganization of all Yazoo related companies, issued 27 shares of its stock to petitioner. On September 1, 1981, YMCI was sold to Robert Hearin (Mr. Hearin) for approximately189 $ 9 million. As the owner of 27 shares of YMCI stock, petitioner, on September 2, 1981, surrendered such stock, in accordance with the June 30, 1981 Stock Purchase Agreement, section 3, in exchange for $ 149,600.00. On their 1981 return, petitioners reported a $ 38,600.00 long-term capital gain on the sale of their 27 shares of YMCI stock, computed as the difference between the $ 149,600.00 sales price and a $ 111,000.00 basis. In his notice of deficiency respondent determined that petitioners failed to substantiate their stock basis and further determined that the gain be computed using a basis of zero. The use of the zero basis results in long-term capital gain being increased by $ 44,400.00 from $ 12,402.40 to $ 56,802.40. At trial, respondent conceded that the basis was not zero but alleged that the maximum basis petitioner was entitled to was $ 200.00. Employee Business ExpensesFrom January 1, 1981 through September 1, 1981, petitioner was Vice President, a shareholder, and a director of YMCI. From September 2, 1981 through December 31, 1982, petitioner served as President of YMCI. Before and during 1981 and 1982 YMCI's policy was to reimburse all business expenses190 incurred by employees at petitioner's level. There was no limitation on the amount or whether the expense was incurred in- or out-of-town. It was not YMCI's policy to reimburse employees for taking non-employee spouses or other family members on YMCI business trips. Such expenses were not considered to be ordinary and necessary business expenses. However, 350 it was not until after Mr. Hearin purchased YMCI in September, 1981 that a written memorandum was issued amplifying and clarifying that fact. Included among the employee business expenses YMCI traditionally reimbursed or paid directly, were airfares, hotel and motel lodging, meals, gasoline, postage, picture/film, and entertainment. To obtain reimbursement YMCI required each employee to fill out an expense report detailing amounts incurred in particular categories per day, advances, credit card charges, and airfares. Additionally, YMCI required employees to submit original receipts, invoices, cash tickets or credit card statements as "backup" documentation. If an employee failed to attach a receipt or submit an expense report, YMCI did not reimburse him or her. YMCI did not expect or require its employees to personally incur191 and pay any business expenses beyond those reimbursed. When YMCI received an expense report, Louise Jones (Mrs. Jones), an employee of YMCI since 1954, 5 reviewed it for mathematical accuracy and then sent it to O. H. Kerr (before September 1, 1981) or Howard Day (after September 1, 1981) for approval. If an expense was business related, YMCI reimbursed the employee for any out-of-pocket expenses. If the employee had received a cash advance and the expenses were less than the amount advanced, the employee would "reimburse" YMCI for such excess. If an expense was determined to be unrelated to any business of YMCI, the company did not reimburse the employee. If, however, YMCI had already paid the expense via credit card or cash advance, the employee was required to reimburse YMCI. YMCI usually advanced funds directly to petitioner, either before his out-of-town business trips, or192 before the arrival of out-of-town business associates when it was anticipated that business-related expenses, including entertainment, would be incurred. YMCI also issued petitioner a corporate bank credit card 6 and telephone calling card as additional means by which he could pay YMCI's business expenses he incurred. In accordance with YMCI's reimbursement policy, if petitioner spent less than the funds advanced, upon submission of a detailed expense report, he returned the unspent funds. If, however, his business expenses exceeded the advance, YMCI reimbursed him. As a result of, and consistent with, YMCI's reimbursement policy, YMCI paid in excess of $ 22,000.00 of the employee business expenses petitioner claimed in 1981 and 1982. Petitioners voluntarily incurred additional expenses during 1981 and 1982 without accounting to YMCI or claiming reimbursement therefor, even though some were the type of expenses YMCI traditionally reimbursed, i.e., gas, food, lodging, meals, and entertainment. As a result, 193 petitioners claimed income tax deductions of $ 13,740.42 and $ 12,996.68 in 1981 and 1982, respectively. In the notice of deficiency, respondent disallowed these deductions as not constituting ordinary and necessary business expenses, or as not being required by the employer, or as constituting nondeductible personal living or family expenses, and/or for lack of adequate substantiation. After all concessions, petitioners now claim that they are entitled to deduct the following as employee business expenses for 1981 and 1982 respectively: 1981Gas -$ 453.21 Food -$ 1,380.63 Pictures -$ 482.61 Postage -$ 74.24 Courthouse -$ 877.29 ** Legal -$ 284.75 Entertainment -$ 49.00 Cleaning -$ 35.23 Education -$ 237.13 Gifts -$ 239.64 Air Fare -$ 4,014.21 Lodging -$ -0-* Miscellaneous -$ 3,107.96 $ 11,408.34351 194 1982Gifts -$ 364.45 Food -$ 963.15 Gas -$ 191.22 Courthouse -$ 607.69 ** Education -$ 62.95 Cleaning -$ 40.64 Postage -$ 35.86 Telephone -$ 284.73 Film -$ 239.42 Security -$ 346.50 Miscellaneous -$ 567.48 Travel -$ 5,801.66 9,505.75 OPINION Stock BasisThe first issue for decision is whether petitioners, for purpose of computing their long-term capital gain, have carried their burden of proving that their YMCI stock basis was greater than $ 200.00. See Welch v. Helvering, 290 U.S. 111 (1933); Rule 142(a). Section 1011(a) provides that "The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections * * ), * * adjusted as provided in section 1016." Section195 1012 provides that "The basis of property shall be the cost of such property, * ." Section 1015 provides that, in the case of property acquired by gift, the basis, for purposes of determining gain or loss, shall be the same as it was in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except, if the basis is greater than the fair market value of the property at the time of the gift then for purposes of determining loss the basis is the fair market value at the time of the gift. Petitioners allege that the basis of the 27 shares of YMCI stock was actually $ 118,000.00, determined by adding the following amounts: (1) $ 10,000 petitioner paid his father for Mrs. Luckett's ten shares of YMCI stock; (2) $ 20,000 petitioner paid his father for five shares of KEI stock; and (3) $ 88,000 petitioner "paid" for his 10,400 shares of YSED stock. Respondent, on the other hand, contends that petitioner has only proved that he actually expended $ 200.00 and, therefore, the maximum basis attributable to the 27 shares of YMCI stock is $ 200.00. To decide whether petitioners have carried their burden we must first determine the composition of the 27 shares196 of YMCI stock, the date they were acquired, and how they were acquired. It is clear, based upon the all the evidence presented, that the 27 shares of YMCI stock in issue consisted only of the 10 shares of YMCI stock transferred from Mrs. Luckett to petitioner on September 7, 1960, plus the five shares of KEI stock transferred from Kerr, Sr. to petitioner on December 31, 1968, plus the $ 200.00 petitioner paid KEI on June 25, 1975 for his .094 fractional share of KEI stock. Therefore, to the extent petitioner alleges that his Master Sales Company, Inc., Auto Electric and Carburetor, Inc., and Yazoo of Texas, Inc. stock increase his YMCI stock's basis we disagree. Ten shares of YMCI stock: $ 10,000.00At trial, petitioner alleged that he had a $ 10,000 basis in the ten shares of YMCI stock he acquired on September 7, 1960 because he either paid his father $ 10,000.00 outright or his father transferred the stock to him in lieu of compensation. Petitioner testified he arrived at the $ 10,000.00 value based on a conversation with his father, wherein his father told him that petitioner owned 10 shares of YMCI stock and that it cost him $ 10,000.00. Petitioner also testified197 that he had no personal knowledge of how his father obtained the shares from Mrs. Luckett, how much was paid, or anything else regarding the transfer and, therefore, relies solely upon the statement his father made to him in order to establish that the YMCI stock had a $ 10,000.00 basis in his hands.I am simply saying that there is a basis, that it cost me something, and I paid for it. Now, whether it was a check or whether it was a gift, whatever, I have no way of saying * ." [TR. 35, ln. 16.] It cost me $ 10,000, and he said I paid for it. And I said, Fine. [TR. 50, ln. 5-7.] Now, how I paid him and how I got it done is, it has either got to be in his eyes a gift -- I don't know how he arranged it -- or I worked for it and he paid me that way." [TR. 49, 4-7.]Respondent, on the other hand, contends that petitioners have failed to prove either (1) that petitioner actually paid his father $ 10,000.00 for the shares, (2) that petitioner received the shares in lieu of compensation and included the fair market value in his income in the year he received them, or (3) that petitioner received the shares as a gift from his father and that his father had a basis of $ 198 10,000.00. We agree with respondent. The record is completely devoid of any corroborating evidence from which we can determine what amount, if any, petitioner or his father paid to acquire Mrs. Luckett's stock. Petitioner was unable to produce a check or any other documented evidence substantiating his allegation that he paid his father $ 10,000.00 for the stock or that his father paid Mrs. Luckett $ 10,000.00. Petitioner has also failed to introduce any evidence corroborating the fact that he received the stock in lieu of compensation and properly included the fair market value of the stock in his income. Moreover, the stock certificates themselves, evidencing the transfer of the stock from Mrs. Luckett to petitioner, fail to reveal the amount Mrs. Luckett received as consideration therefor. 352 Petitioner really does not know how he acquired the stock. Nevertheless, we believe that no matter how petitioner acquired it, either by gift or purchase, his basis is at least equal to Mrs. Luckett's, i.e., par value. Joplin v. Commissioner, 17 T.C. 1526">17 T.C. 1526, 1532 (1952). See Cohan v. Commissioner, 39 F.2d 540">39 F.2d 540 (2d Cir. 1930). Under the circumstances here, 199 we find it appropriate to apply the Cohan rule of approximation and find petitioner has a $ 1,000.00 basis. 7Five shares of KEI stock: $ 20,000.00Petitioner testified that he paid his father $ 20,000.00 as part of a negotiated deal to acquire the "Munger" part of the company. The $ 20,000.00 purportedly consisted of bonuses earned between 1967 and 1968 and monies earned from commissions while managing YSED while attending graduate school. We are not convinced, however, that petitioner actually paid his father anything for the five shares of stock. First, petitioner is unable to produce the $ 20,000 check to his father. KEI's stock records neither establish the amount petitioner paid for such shares nor the donor's basis if petitioner acquired them by gift. However, we believe petitioner's father had at least a $ 500 basis in these shares. Joplin v. Commissioner, supra; Cohan v. Commissioner, supra.Accordingly, we find petitioner's basis to be $ 500. 10,400 shares of YSED stock: $ 88,000.00Petitioner alleges that the basis of the 27 shares200 of YMCI stock should somehow reflect the purported $ 88,000.00 basis he had in his YSED stock, since YSED merged into YSC and YSC merged into YMCI. In support, petitioner alleges the following: After his father's death he, as the owner of YSED, and as president of YSC, merged the two companies. YSC agreed to purchase his YSED stock for $ 88,000.00, but he was never paid. Instead, YSC arranged for petitioner to receive credit for said amount when YSC merged with YMCI. As a result of YSC's merger into YMCI, his basis in the 27 shares of YMCI issued to him 3 years later reflects the $ 88,000.00 basis he had in his YSED stock. We believe petitioner's testimony to the extent that YSED merged into YSC. Furthermore, even though Mrs. Jones testified that petitioner did not own any YSC stock before its December 1972 merger with YMCI, we nonetheless believe petitioner received credit for said shares when YSC merged with YMCI. Therefore, we find that the YSED stock basis should be considered in determining the basis in his 27 shares of YMCI stock. However, we do not believe petitioner proved an $ 88,000.00 basis. Petitioner alleges that he "paid" a total of $ 88,000.00 for his stock201 and presents three separate and distinct theories as proof. First, petitioner states YSED had a sole distributor contract before it merged with YSC, and, as a result of the merger, he gave up said contract. Petitioner then values the contract at $ 88,000.00. Next, petitioner states that he personally paid approximately $ 88,000.00 of YSED's debts and thereby increased his YSED stock basis by the same. Finally, petitioner alleges that he paid $ 87,500.00 for the stock when his father incorporated YSED, and $ 500.00 to acquire Sidney Dupry's shares before YSED merged with YSC. We find these theories inconsistent and totally unpersuasive. We believe, however, petitioner's basis was at least equal to par value. Therefore, we estimate and find his basis to be $ 10,400.00, whether acquired by gift or by purchase. Cohan v. Commissioner, supra.Based upon the forgoing, we conclude petitioner proved a basis of $ 12,100.00, and hold accordingly. Employee Business Expense DeductionsThe next issue for decision is whether petitioners are entitled to deduct, as employee business expenses, any of the amounts claimed on their 1981 and 1982 returns and not previously202 conceded. Section 162(a) allows a deduction for all the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business. Performance of services as an employee constitutes a trade or business. See O'Malley v. Commissioner, 91 T.C. 352 (1988). Therefore, a deduction for entertainment, transportation, lodging, office, and any other customary business expenses is appropriate if the "ordinary and necessary" test is otherwise satisfied. The term "ordinary and necessary business expenses" means only those expenses which are commonly incurred in, appropriate or helpful to, and directly connected with the conduct of the taxpayer's trade or business. Sections 1.162-1(a) and 1.162-17(a), Income Tax Regs. See Welch v. Helvering, supra. The term neither includes expenses which are personal in nature, such as personal living or family expenses disallowed by section 262, see sections 1.162-17(a) and 1.274-5(e)(1), 203 Income Tax Regs., nor expenses, the type which an employer traditionally reimburses, where the employee fails to seek reimbursement. Orvis v. Commissioner, 788 F.2d 1406 (9th Cir. 1986), affg. a Memorandum Opinion of this Court; Coplon v. Commissioner, 277 F.2d 534">277 F.2d 534, 535 (6th Cir. 1960), affg. a Memorandum Opinion of this Court; Leamy v. Commissioner85 T.C. 798">85 T.C. 798 (1985); Kennelly V. Commissioner, 56 T.C. 936">56 T.C. 936, 943 (1971), affd. without opinion 456 F.2d 1335">456 F.2d 1335 (2d Cir. 1972). 353 When an employer has a plan for reimbursing certain employee expenses, and the employee fails to seek reimbursement, such failure results in the disallowance of a deduction for such expenses, since the expense in not considered "necessary" in order for the taxpayer to perform his trade or business of being an employee, i.e., it is not necessary for an employee to remain unreimbursed for expenses to the extent he could have been reimbursed. Orvis v. Commissioner, supra; Heineman v. Commissioner, 82 T.C. 538">82 T.C. 538, 545 (1984);204 Lucas v. Commissioner, 79 T.C. 1">79 T.C. 1, 7 (1982); Podems v. Commissioner, 24 T.C. 21 (1955). Furthermore, the mere failure by an employee/taxpayer to seek reimbursement cannot convert the employer's expenses into the employee's. Kennelly v. Commissioner, supra.Therefore, an employee who wishes to deduct employee business expenses in excess of the amounts paid directly by his employer or received from his employer as advances, reimbursement, or otherwise, must establish that they are ordinary and necessary business expenses of the taxpayer's trade or business of being an employee, of earning his salary and/or carrying on his executive duties. Coplon v. Commissioner, supra; Kennelly v. Commissioner, supra; Stolk v. Commissioner, 40 T.C.345 (1963), affd. 326 F.2d 760">326 F.2d 760 (2d Cir. 1964). Petitioner alleges that (1) YMCI's reimbursement policy before and after September 1, 1981 did not provide for the reimbursement of business expenses incurred while in Jackson, and therefore, any locally incurred business expenses are properly deductible by him, and (2) he has sufficiently substantiated205 the fact that the expenses claimed as employee business expenses in 1981 and 1982 are deductible. Respondent, on the other hand, contends that the claimed expenses were not ordinary and necessary since they represent either (1) the type of employee business expenses YMCI traditionally reimbursed had petitioner sought reimbursement, or (2) nondeductible personal living expenses. We agree with respondent. Most of the expenses claimed are the type YMCI traditionally reimbursed. In fact, in 1981 and 1982, petitioner was reimbursed for expenses of the same type as those in issue here. Moreover, the evidence shows that YMCI reimbursed all expenses, including those incurred locally, even though petitioner alleges the contrary. We conclude that the items petitioners deducted as gifts, food, gas, pictures/film, postage, legal, lodging, entertainment, cleaning, telephone, security, miscellaneous [for 1981 and 1982], and $ 772.23 of travel (1982), constitute nondeductible expenses, since they either could have been or already had been reimbursed or were not "necessary" under section 162(a). With respect to the remaining expenses, i.e., "Courthouse" "Education" (1981-1982), "Air Fare" 206 (1981), and $ 4,118.43 of "Travel" (1982), petitioners have failed to prove such expenses were "necessary" or to properly substantiate such expenses in accordance with section 274 and the regulations thereunder. CourthousePetitioner deducted $ 877.29 and $ 607.69 in 1981 and 1982, respectively, as fees and dues he incurred as a member of the "Courthouse" athletic facility. To be entitled to deduct expenses associated with the use of an athletic club petitioner must (1) prove that it is an ordinary and necessary business expense and (2) satisfy the substantiation requirements of section 274(a)(1)(B), and the applicable regulations thereunder. See sections 1.274-2(a)(2)(ii)(a) and (b), and 1.274-5(c)(6)(iii), Income Tax Regs.Section 1.274-2(a)(ii), Income Tax Regs., states in pertinent part:no deduction otherwise allowable under chapter 1 of the Code shall be allowed for any expenditure paid or incurred . . . with respect to a club used in connection with entertainment,207 unless the taxpayer establishes -- (a) That the facility or club was used primarily for the furtherance of the taxpayer's trade or business, and (b) That the expenditure was directly related to the active conduct of that trade or business.Petitioner alleges that his membership in "Courthouse" was necessary in order for him to "visit with suppliers, his transportation man, his customers, his fork lift man and his advertising folks." He stated he did not need the exercise, only the time to be alone with those substantial people to get Yazoo business done. Petitioner's evidence falls far short of that required by section 274. Even if such expenses constituted valid employee business expenses petitioner would still have to satisfy the substantiation requirements, which he has failed to do. If a taxpayer fails to maintain adequate records with respect to a facility which is likely to serve the personal purposes of the taxpayer and his family, it shall be presumed that the use of such facility was primarily personal. Section 1.274-5(c)(6)(iii), Income Tax Regs.208 We find petitioner's Courthouse expenses were personal. EducationPetitioner alleges that the payments to "Trim", " The World Book Year", "U.S. News 354 and World Report", "The Knapp Press", "Reader's Digest", "American Opinion", "The Review of the News", his membership dues in the John Birch Society, and hunting and fishing licenses are all deductible as unreimbursed employee business expenses. Respondent, on the other hand, contends that petitioners have failed to establish a business purpose for incurring the expenses. We agree with respondent. Air Fare: Family TravelIn 1981 and 1982, petitioners deducted $ 4,014.21 and $ 5,029.43, respectively, as employee business expenses representing airfares, meals, lodging, and other expenses incurred by Mrs. Kerr and petitioners' children while accompanying petitioner on business trips. [See Appendix A.] It was YMCI's policy not to reimburse an employee for any expense incurred by nonemployee family members when they accompanied employees on business trips, since YMCI did not consider their presence necessary to conduct its business. In fact, YMCI required petitioner to reimburse it for such expenses it paid. 209 Petitioner must thus prove that his family's travel was an ordinary and necessary part of his trade or business of being an employee, i.e., earning a salary and/or carrying on his executive duties. Stolk v. Commissioner, supra.Section 1.162-2(c), Income Tax Regs. provides that:Where a taxpayer's wife accompanies him on a business trip, expenses attributable to her travel are not deductible unless it can be adequately shown that the wife's presence on the trip has a bona fide business purpose. The wife's performance of some incidental service does not cause her expenses to qualify as deductible business expenses. The same rules apply to any other members of the taxpayer's family who accompany him on such a trip.Petitioner alleges that Mrs. Kerr's presence at the Outdoor Power Equipment Institute (OPEI) meetings, especially the meeting in Brussels, was vital to his trade or business of being an executive of YMCI. He states that Mrs. Kerr was invited to Brussels by OPEI to sponsor the American National Safety Institute and to represent them as secretary, and because Mrs. Kerr is210 bilingual, she was able to help translate during the meetings. Under these special circumstances we agree that Mrs. Kerr's presence in Brussels served a bona fide business purpose since she provided services directly and primarily related to petitioner's business by facilitating communication with the Europeans present and by taking on the specific duties connected with OPEI meeting. Cf. Anchor National Life Insurance Co. v. Commissioner, 93 T.C. 382">93 T.C. 382, 431-432 (1989). See sec. 274(c). However, with respect to all other trips, although Mrs. Kerr's presence may have been helpful and beneficial to petitioner, no bona fide business purpose was proved. Being "helpful" is not enough; a wife's or child's functions while traveling with petitioner must be "necessary" to the conduct of his business before a deduction will be allowed for their expenses. United States v. Gotcher, 401 F.2d 118">401 F.2d 118, 124 (5th Cir. 1968); Moorman v. Commissioner, 26 T.C. 666">26 T.C. 666 (1956). See Anchor National Life Insurance Co. v. Commissioner, supra.211 With respect to the expenses of their children, Mrs. Kerr testified that they always helped out with all aspects of the Yazoo family business, without receiving compensation therefore, because they believed the business would be theirs one day. This is not evidence that the presence of the children was in any way "necessary" to petitioner's trade or business of being an executive or employee. We conclude that only Mrs. Kerr's expenses to the Brussels meeting are deductible. Additions to TaxSection 6653(a)(1) and (a)(2)The next issue for decision is whether petitioners are liable for the additions to tax for negligence under section 6653(a)(1) and (a)(2). Since these additions were asserted by respondent in his amended answer, he bears the burden of proving by a preponderance of the evidence that the underpayment of tax is due to petitioners' negligence or their intentional disregard of the rules and regulations. See Rule 142(a). Negligence is defined as the lack of due212 care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. Marcello v. Commissioner, 380 F.2d 499">380 F.2d 499, 506 (5th Cir. 1967), affg. in part and remanding in part 43 T.C. 168">43 T.C. 168 (1964); Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Petitioners stipulated that for taxable year 1981, the disallowed $ 21,770.00 Schedule C expenses for "Shaklee Distributorship" is attributable to negligence for purposes of section 6653(a)(1) and further stipulated that at least $ 21,770.00 is attributable to negligence for purposes of computing the addition to tax under section 6653(a)(2). Respondent contends that petitioners are liable for the section 6653(a) additions attributable to the following additional items: In 1981 petitioners deducted (1) $ 3,341.37 as employee business expenses related to Nicole's modeling activity; (2) $ 15,065.92 interest expense substantiating 355 only $ 4,930.91; (3) $ 7,908.35 charitable contributions substantiating only $ 4,800.00. In 1982 petitioners deducted $ 6,916.75 charitable contributions, substantiating only $ 4,979.00. Respondent also contends that petitioner's failure to adequately213 maintain records, in light of his education and business experience further supports a finding of negligence. We agree. Petitioners failed to exercise due care by (1) claiming deductions in excess of what they could adequately substantiate, as required by section 6001 and the regulations promulgated thereunder; (2) failing to further inquire into the appropriate treatment of the unreimbursed employee business expenses; (3) taking deductions for personal expenses; and (4) claiming a stock basis which they could not adequately substantiate. Therefore, we find that petitioners are liable for the section 6653(a)(1) and (a)(2) negligence additions for 1981 and 1982. The additions shall apply to the entire deficiency redetermined above. Section 6651The next issue is whether petitioners are liable for a 10 percent addition to tax under section 6651(a)(1) for failure to timely file their Federal income tax return for 1981. Respondent bears the burden of proof on this issue. Wayne Coal Mining Co. v. Commissioner, 209 F.2d 152">209 F.2d 152 (3d Cir. 1954), affg. a Memorandum Opinion214 of this Court; Rule 142(a). He thus must show not only that petitioners' return for 1981 was filed late, but also that the late filing was due to "willful neglect" and not due to "reasonable cause," within the meaning of section 6651(a)(1). Gardner v. Commissioner, T.C. Memo 1987-420">T.C. Memo. 1987-420, affd. without published opinion 884 F.2d 1392">884 F.2d 1392 (6th Cir. 1989), Bruner Woolen Co. v. Commissioner, 6 B.T.A. 881">6 B.T.A. 881, 882 (1927). Reasonable cause has been defined as the exercise of "ordinary business care and prudence." Sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect is a conscious, intentional failure or reckless indifference. United States v. Boyle, 469 U.S. 241">469 U.S. 241 (1985). Respondent relies on the Internal Revenue Service Center "date received" stamp and the "postmark date" notation appearing on the 1981 return, to prove that petitioners' return was not mailed until May 17, 1982 or received until May 20, 1982. Respondent's only "evidence" that petitioners lacked reasonable cause, was, in essence, that we should not believe petitioners' testimony as to the events surrounding their filing of the 1981 return, since other215 evidence presented by petitioners was inconsistent and therefore unreliable. We are not persuaded. Respondent has failed to carry his burden of proof on this issue. We hold that no addition to tax under section 6651(a)(1) is imposed. 8Section 6661(a)The last issue is whether petitioners are liable for the addition to tax under section 6661(a) for substantial understatement of income tax with respect to their tax year 1982. Petitioners bear the burden of proof on this issue. Rule 142(a). An understatement216 is substantial if it exceeds the greater of $ 5,000.00 or 10 percent of the amount required to be shown on the return. The amount of the understatement is reduced for section 6661 purposes by the portion of the understatement which is attributable to the taxpayer's treatment of an item for which there was "substantial authority," or if the relevant facts affecting the item's tax treatment are "adequately disclosed" on the return or in a statement attached thereto. Sec. 6661(b)(2)(B)(i) and (ii). In his notice of deficiency, respondent determined that, due to the adjustments made to petitioners' 1982 joint Federal income tax return, they were liable for a ten percent addition to tax pursuant to section 6661(a). Petitioners did not offer "substantial authority" for their understatement nor did they "adequately disclose" any facts affecting the tax treatment of the items in issue. Accordingly, they are liable for the addition to tax under section 6661. The Omnibus Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002(a), 100 Stat. 1874, 1951, increased the section 6661(a) addition to217 tax to 25 percent of the underpayment attributable to a substantial understatement for additions to tax assessed after October 21, 1986. Respondent, however, has not amended his answer to seek an increase to such addition to tax over the amount determined in the notice of deficiency. Accordingly, we sustain respondent's determination as set forth in the notice of deficiency. To reflect the foregoing and concessions by both parties, Decision will be entered under Rule 155. 356 APPENDIX A 19811.$ 1,842.21 -for Mrs. Kerr's air fare to Europe2.$ 2,172.00 -air fare for Mrs. Kerr and children toMuskegon$ 4,014.2119821.$ 911.00 -air fare for Mrs. Kerr to Brussels toattend OPEI Meeting2.$ 2,676.00 -air fare for Mrs. Kerr and children toattend an OPEI meeting in California.3.$ 175.00 -Registration for everyone to the OPEImeeting in California4.$ 200.00 -Room Deposit for OPEI meeting5.$ 708.79 -Lodging during OPEI meeting, La CostaResort6.$ 103.42 -Lodging in Colorado7.$ 53.29 -Lodging in Oakland8.$ 143.63 -Lodging in Phoenix9.$ 58.30 -Lodging in Santa Barbara$ 5,029.43 218 Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended, and in effect for 1981 and 1982. All Rule references are to the Tax Court Rules of Practice and Procedure.↩. 50 percent of the interest due on $ 11,292.62. ↩2. Kerr, Sr. subsequently incorporated YSED sometime between 1966 and January 8, 1968.↩3. Kerr, Sr. had been issued 500 shares on April 1, 1959 and on December 31, 1968 he transferred 5 to petitioner leaving him with 495 shares.↩4. It was determined that petitioner was entitled to receive 21.904 shares of KEI stock for his ten shares of YMCI stock and that for an additional payment of $ 200.00, petitioner would receive a total of 22 shares of KEI stock. The $ 200.00 represents the cost to petitioner of purchasing the .096 fractional share of KEI stock.↩5. During Mrs. Jones' employment with YMCI she worked in various capacities, including expense accounts and reimbursements. She was familiar with YMCI's policy and what type of expenses were considered business or nonbusiness. In 1981 and 1982 she was in charge of the reimbursement program.↩6. Prior to and during 1981, an American Express card was used. Sometime after Mr. Hearin purchased YMCI the American Express card was replaced with a VISA bank card.↩. Takes into account petitioners concessions on brief, with respect to the $ 82.44 food and $ 90.00 lodging expenses. ↩. Courthouse is an athletic facility of which petitioner is a member. These expenses represent membership fees and monthly dues.↩. Courthouse is an athletic facility of which petitioner is a member. These expenses represent membership fees and monthly dues.↩7. See Dockery v. Commissioner, T.C. Memo. 1978-63↩.8. We note however, that if the burden of proof had been upon petitioners to show that their failure to file on time was "due to reasonable cause and not due to willful neglect," their explanation might well not be sufficient to relieve them of the ten-percent addition to tax. See United States v. Boyle, 469 U.S. 241">469 U.S. 241 (1985); Gardner v. Commissioner, T.C. Memo. 1987-420, affd. without published opinion 884 F.2d 1392">884 F.2d 1392↩ (6th Cir. 1988).*. These expenses petitioner paid directly to Avanti Travel, all other expenses were initially paid by YMCI and petitioner was therefore required to reimburse it.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620877/	JESSIE G. BROWN, AS EXECUTRIX OF THE LAST WILL AND TESTAMENT OF MILTON HAY BROWN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Brown v. CommissionerDocket No. 91093.United States Board of Tax Appeals41 B.T.A. 582; 1940 BTA LEXIS 1163; March 19, 1940, Promulgated 1163 Kate Hay Brown died intestate October 28, 1923, leaving a husband and three children. The estate consisted principally of real property. On December 24, 1923, the interests of the heirs were transferred by warranty deed to trustees for the heirs' benefit. The husband, Stuart Brown, never filed of record a waiver of dower. He died intestate less than one year after the death of his wife. Held, that Stuart Brown had only a dower interest in his wife's estate and that each of the children conveyed to the trust a one-third interest in fee in their mother's estate, subject to the dower rights of Stuart Brown; held, further, that a one-third interest therein is includable in the gross estate of the decedent, one of the three children. Opinion at 40 B.T.A. 933, modified accordingly. Albert C. Schlipf, Esq., and Logan Hay, Esq., for the petitioner. Franklin F. Korell, Esq., for the respondent. SMITH 583 SUPPLEMENTAL OPINION. SMITH: The decedent herein was a son of Kate Hay Brown. In our prior opinion in this case, 1164 , we said: Prior to her death on October 28, 1923, Kate Hay Brown owned an undivided one-half interest in a number of farms and other parcels of real property inherited by her from her father. Upon her death her husband, Stuart Brown, inherited a one-third undivided interest in fee and each of their three children inherited a two-ninths interest in fee in the estate. The heirs decided that it was impracticable to set off their interests in metes and bounds and decided that it was to the interest of all to keep their interests undivided. They therefore created a trust, evidenced by the trust instrument executed on December 24, 1923. Stuart Brown contributed his undivided one-third interest and each of the three children contributed his two-ninths interest to the trust estate, * * * * * Prior to the creation of the trust on December 24, 1923, Stuart Brown had an undivided one-third interest in fee in the estate of Kate Hay Brown. Joining with his children he transferred this property to the trust on December 24, 1923, with the right to receive the income for life with the further right to say who of the descendants of Kate Hay Brown should receive1165 his share upon his death. * * The simple facts are that the interest in the corpus of the trust estate owned by his father, Stuart Brown, never became a part of the decedent's estate. He simply had a right to receive the income for life from one-third of his father's interest in the trust estate, with a limited power of appointment with respect thereto. * * * The above statements were based upon our understanding of the statutes of the State of Illinois. The respondent now contends that the courts of Illinois have interpreted the statutes differently. The point has been reargued by counsel. The issue is whether Stuart Brown transferred to the trust on December 24, 1923, a one-third interest in fee in the property of his wife, Kate Hay Brown, or only a dower interest. If he transferred one-third, then our original opinion was correct. But, if it was only a dower interest then Milton Hay Brown, the decedent in this case, transferred to the trust a one-third interest in his mother's estate subject only to the dower rights of his father, Stuart Brown, in that one-third. The petitioner contended and contends that the interest in the property transferred by Stuart Brown1166 was a one-third interest in fee. The Illinois statute in force at the time of the death of Kate Hay Brown and of also her husband, Stuart Brown, provided as follows: Fourth - When there is a widow or surviving husband, and also a child or children or descendants of such child or children of the intestate, the widow or surviving husband shall receive, as his or her absolute personal estate, one-third of all the personal estate of the intestate; and he or she shall also receive as his or her absolute estate, in lieu of dower therein, one-third of each parcel of 584 real estate of which the intestate died seized and in which such widow or surviving husband shall waive his or her right of dower. Such waiver may be effected by either or both of the following methods: (a) By filing or recording, within one year after the death of the intestate, in the manner hereinafter provided, an instrument in writing duly signed and acknowledged by the surviving widow or husband expressing his or her intention to waive dower in such real estate; and (b) By failing to file or record within one year after the death of the intestate, in the manner hereinafter provided, an election to take1167 dower in such real estate. * * No such instrument, whether electing to take or waive dower, shall be of any effect unless filed or recorded within the time, in the manner and in the office herein provided. [Smith-Hurd Illinois Revised Statutes, 1923, ch. 39, § 1, p. 744.] In ; , the wife died intestate, leaving her husband and two children as her sole heirs at law. The husband died intestate eight days after the death of his wife and was survived by his son by a prior marriage. The son contended that his father inherited one-third of all of the real estate of which his wife died seized and that upon his death this one-third interest in fee descended to him as heir of his father. In denying this contention the court said: The waiver of the right of dower is a condition precedent to the right of the widow or surviving husband to claim one-third of the real estate in fee, and in order to establish her or his right to the interest in fee a waiver of dower in a manner provided by the statute must be alleged and proved. 1168 . The cross-bill in the present suit alleges no waiver by appellant's father of his right of dower, but, on the contrary, states that by the death of Mrs. Milham her surviving husband became vested in fee, in lieu of dower, of an undivided one-third of each parcel of real estate of which she died seized. The surviving husband upon his wife's death took only a right of dower, and not an interest in fee in his deceased wife's real estate. The statute gave him the right to renounce his dower for an ampler estate, but until he exercised that right by either or both of the methods prescribed he merely retained his dower and did not acquire an interest in fee simple. By his death eight days after the death of his wife, without exercising his election, his right of dower, which was for life only, was extinguished, and his right of election necessarily terminated at the same time. A life estate is not inheritable, hence the appellant, so far as any interest in the real estate which Mrs. Milham owned is concerned, inherited nothing from his father. Appellant cannot revive an extinct life estate, convert it into a fee simple1169 interest, and inherit the latter. In ; , the court held that: Waiver of widow's right of dower by filing and recording writing expressing such intention in manner provided by Statute of Descent (Smith-Hurd Rev. St. 1927, c. 39), § 1, par. 4, cl. (a), or by failing to file or record election to take dower within year after husband's death under clause (b), must be alleged and proved to entitle her to claim one-third of decedent's realty in fee. To the same effect is . 585 No claim is made by the petitioner that Stuart Brown filed any instrument of record waiving his right of dower. He died October 26, 1924, or less than one year after the death of his wife. The petitioner argues that since Stuart Brown joined his three children in the trust indenture and in the execution of the warranty deed he in effect waived his dower rights in the estate of his wife and legally made the election to receive a one-third interest in fee in lieu of dower. Under the above decisions of the Illinois courts, which are binding1170 upon the Board in the matter under consideration, a waiver of dower rights in real estate can be made only in the manner provided by statute, that is, by filing such a written waiver within one year after the death of the deceased spouse or by failing to do so within one year. Counsel for the petitioner has not referred us to any opinions of the Illinois courts in conflict with those above cited. In accordance therewith it must be held that at the time of the execution of the trust indenture on December 24, 1923, Stuart Brown had only a dower interest in the estate of Kate Hay Brown. His dower interest is the only interest which he transferred or could have transferred to the trust. This being true, it must be held that Milton Hay Brown transferred a one-third interest in the estate of his mother, subject to the dower right of his father. There is no evidence as to the value of that dower right. We think that the respondent did not err in including in the gross estate of the decedent the value of a one-third interest in the trust estate, stipulated to be $241,808.45. The opinion of the Board, promulgated at *1171 , is modified accordingly. Reviewed by the Board. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620850/	SHEARN MOODY, JR., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, RespondentMoody v. CommissionerDocket Nos. 2566-88, 1659-89.United States Tax CourtT.C. Memo 1995-440; 1995 Tax Ct. Memo LEXIS 437; 70 T.C.M. 678; September 14, 1995, Filed 1995 Tax Ct. Memo LEXIS 437">437 William R. Cousins III, for petitioner. Melanie R. Urban and David E. Whitcomb, for respondent. WRIGHT, Judge WRIGHTMEMORANDUM OPINION WRIGHT, Judge: This matter is before the Court on petitioner's motion for litigation and administrative costs under section 74301 and Rule 231. The merits of the underlying cases were decided in Moody v. Commissioner, T.C. Memo. 1995-195, filed May 2, 1995. To the extent necessary for the disposition of this motion, the facts and holdings in T.C. Memo. 1995-195 are incorporated by this reference. References to petitioner are to Shearn Moody, Jr. The issue presented is whether petitioner has established that respondent's position in the underlying litigation and administrative proceedings, factually and legally, was not substantially justified. As discussed1995 Tax Ct. Memo LEXIS 437">438 in the ensuing opinion, we hold that petitioner has not made this showing. Thus, an order and decision will be entered in each case in which we deny petitioner's motion. Under section 7430(a), a "prevailing party", in specified civil tax proceedings, may be awarded a judgment for reasonable administrative and litigation costs. To be a prevailing party under section 7430(c)(4), the party seeking such award must: (1) Establish that the position of the United States in the proceeding was not substantially justified, sec. 7430(c)(4)(A)(i); (2) substantially prevail with respect to the amount in controversy, or have substantially prevailed with respect to the most significant issue or set of issues presented, sec. 7430(c)(4)(A)(ii); and (3) establish that he or she has a net worth that did not exceed $ 2 million at the time the proceeding was commenced, sec. 7430(c)(4)(A)(iii). Additionally, a judgment for administrative and litigation costs will not be awarded under section 7430(a) unless the Court determines: (1) That the prevailing party has exhausted the administrative remedies available with the Internal Revenue Service, sec. 7430(b)(1); and (2) that the prevailing party has not1995 Tax Ct. Memo LEXIS 437">439 unreasonably protracted the court proceeding, sec. 7430(b)(4). See Bragg v. Commissioner, 102 T.C. 715">102 T.C. 715, 102 T.C. 715">717 (1994); Polyco, Inc. v. Commissioner, 91 T.C. 963">91 T.C. 963, 91 T.C. 963">966-967 (1988). A party seeking costs bears the burden of proving that he is entitled to them. Rule 232(e); 102 T.C. 715">Bragg v. Commissioner, supra;Gantner v. Commissioner, 92 T.C. 192">92 T.C. 192, 92 T.C. 192">197 (1989), affd. 905 F.2d 241">905 F.2d 241 (8th Cir. 1990). Respondent does not contest that petitioner has substantially prevailed in the underlying litigation, has met the net worth requirement, has exhausted the administrative remedies, and has not unreasonably protracted the proceedings. Thus, we turn to the question whether respondent's position was substantially justified. Whether the position of respondent in this proceeding was substantially justified depends on whether respondent's position and actions were reasonable in light of the facts of the case and applicable precedents. Bragg v. Commissioner, 102 T.C. 715">102 T.C. 716; Price v. Commissioner, 102 T.C. 660">102 T.C. 660, 102 T.C. 660">662 (1994);1995 Tax Ct. Memo LEXIS 437">440 Sher v. Commissioner, 89 T.C. 79">89 T.C. 79, 89 T.C. 79">84 (1987), affd. 861 F.2d 131">861 F.2d 131 (5th Cir. 1988). "Substantially justified" means "'justified in substance or in the main'--that is, justified to a degree that could satisfy a reasonable person", Heasley v. Commissioner, 967 F.2d 116">967 F.2d 116, 967 F.2d 116">120 (5th Cir. 1992) (quoting Pierce v. Underwood, 487 U.S. 552">487 U.S. 552, 487 U.S. 552">565 (1988)). 2 The fact that respondent ultimately is unsuccessful at litigation or concedes the case is not necessarily determinative that respondent's position was unreasonable. 102 T.C. 660">Price v. Commissioner, supra at 662-665; Wasie v. Commissioner, 86 T.C. 962">86 T.C. 962, 86 T.C. 962">969 (1986). 1995 Tax Ct. Memo LEXIS 437">441 Generally, when respondent presents evidence which, if credited by the Court, is sufficient to support a decision in respondent's favor, there will necessarily be a reasonable basis for respondent's position. See Wilfong v. United States, 991 F.2d 359">991 F.2d 359, 991 F.2d 359">369 (7th Cir. 1993). In general, section 4941(a)(1) and (b)(1) impose upon a "disqualified person"--such as petitioner--excise taxes computed as specified percentages of the "amount involved" in each act of "self-dealing" between the disqualified person and a private foundation. The primary issue for our consideration in the underlying cases was whether petitioner was liable for such taxes based upon alleged acts of self-dealing with respect to the assets of, or grants made by, a private foundation called the Moody Foundation. We held that petitioner was so liable, but in amounts very substantially less than those asserted by respondent. Petitioner now assails respondent's position as to the issues addressed in the underlying opinion; we address them in order. Hotel WashingtonPetitioner was one of three trustees of the Moody Foundation, a private charity that owned very substantial assets. 1995 Tax Ct. Memo LEXIS 437">442 The Moody Foundation is organized for the benefit of the people of Texas. Among other things, the Moody Foundation owns 50 percent of the stock of a corporation named Gal-Tex. A Moody family trust owns the other 50 percent. Petitioner was a member of the Gal-Tex board of directors. Gal-Tex owns a number of assets, including a property in Washington, D.C., named the Hotel Washington. Although petitioner received complimentary use of a room, he and his guests incurred substantial unpaid charges at the Hotel Washington. Respondent asserted that petitioner's activities in this regard constituted "indirect" self-dealing with Moody Foundation assets within the meaning of section 4941. Respondent's premise is that a person in petitioner's position can, in some circumstances, engage in indirect self-dealing with a private foundations's assets by engaging in transactions with an organization that is controlled by the private foundation. In making this argument, respondent relied upon section 53.4941(d)-1(b)(5), Foundation Excise Tax Regs. That regulation provides, in part, that an organization is controlled by a private foundation if the foundation, or the foundation and a persons in petitioner's1995 Tax Ct. Memo LEXIS 437">443 position, "are able, in fact, to control the organization (even if their aggregate voting power is less than 50 percent of the total voting power of the organization's governing body)". We believe that respondent's position is well founded consistent with section 4941, and, thus, substantially justified in law. As we said in our opinion, "we have little trouble with respondent's premise" as to the applicability of section 4941 in such a situation. The question then arises whether respondent was justified with respect to the facts supporting her determination that the Moody Foundation was able to control Gal-Tex. The evidence showed that petitioner was a member of the board of directors of Gal-Tex, the corporation that owned the Hotel Washington, as well as one of the trustees of the Moody Foundation, which in turn owned half the stock of Gal-Tex. Moreover, at the proceeding below, there was no dispute that petitioner and his friends and associates ran up very substantial charges at the hotel, and that these charges were never paid. On this evidence, respondent was clearly justified in taking the position that the Moody Foundation was able in fact to control Gal-Tex, at least to the1995 Tax Ct. Memo LEXIS 437">444 extent that petitioner and his associates were permitted to run up unpaid charges at the Hotel Washington. See sec. 53.4941(d)-1(b)(5), Foundation Excise Tax Regs. We nevertheless held that, taking into account all the facts and circumstances, the Moody Foundation did not possess actual control over the activities of Gal-Tex, nor the Hotel Washington. Thus, as to the unpaid hotel charges, petitioner did not engage in self-dealing with the assets of the Moody Foundation, and therefore, he was not liable for the excise taxes concerning those charges. Our determination that petitioner was not subject to those taxes was, in substantial measure, based upon our appraisal of testimony by hotel officials. They indicated credibly that the hotel management sought reimbursement of the charges at issue not only from petitioner's estate in bankruptcy but also from the Moody Foundation itself. The Moody Foundation refused to pay on the reasonable grounds that petitioner's charges did not constitute foundation business. Our evaluation of the hotel officials' testimony was corroborated by other evidence, including our impression of petitioner himself, principally as gleaned from his own testimony. 1995 Tax Ct. Memo LEXIS 437">445 This evidence cumulatively persuaded us that petitioner could not use his influence in the Moody Foundation to control Gal-Tex, despite substantial circumstantial evidence indicating that his unpaid hotel charges were a result of such influence. Had we resolved those issues of credibility differently, we might have found that petitioner exercised sufficient control to be said to have engaged in self-dealing with Moody Foundation assets. Thus, although we found for petitioner, we cannot say that respondent's position that the unpaid hotel charges constitute self-dealing was not "substantially justified" on the basis of the evidence available. Moody Foundation GrantsPetitioner was also involved in the activities of a number of organizations--the "grantees"--which obtained their funding in the form of grants from the Moody Foundation. These organizations engaged in activities in which petitioner was interested. Respondent characterized the Moody Foundation grants at issue under three categories--the Caddy grants, the Pabst grants, and the Bauman grants--naming the categories after individuals who were involved, in varying measures, with the grantee organizations. The evidence1995 Tax Ct. Memo LEXIS 437">446 suggested that the grantee organizations expended much of the Moody Foundation grants in questionable ways, often to the benefit of their promoters. The Court was faced with determining petitioner's liability for excise taxes based upon alleged self-dealing with the amounts of the grants. This required our evaluation of the part played by petitioner in each grantee organization, especially concerning petitioner's role in each grantee's obtaining money from the Moody Foundation. In so doing, we were also called upon to evaluate the part played by the grantees' principals in the solicitation and administration of the award. We also had to dissect the relationship between petitioner and those individuals, and the degree of petitioner's control of the Moody Foundation assets. As to the issue of the grants, respondent made the legal argument that the "amount involved" in petitioner's alleged acts of self-dealing with the grantee organizations "is measured by the amount of the grants made by the Moody Foundation". Respondent contended that: "It does not matter what the self-dealer receives, or how much the self-dealer benefits." Instead, "the focus here is on what the foundation gives1995 Tax Ct. Memo LEXIS 437">447 at the time of the self-dealing". Respondent cited material from a Congressional staff report in support of this contention. We disagreed with respondent's analysis as it was applied to these cases. We did not consider the "amount involved" in these cases to be the entire amount of the grants at issue. Rather, we held that the amount involved was limited to the amounts directly or indirectly transferred to petitioner, or used by him or for his benefit. Although we disagreed with the terminology used by respondent to justify the asserted deficiencies, we did not, and do not, find respondent's legal position unjustified. If petitioner had distributed the amounts at issue to his friends and pet causes--as if such amounts were his and not the Foundation's--his actions might have been self-dealing in the form of "use" of foundation assets by a disqualified person. In fact, in the underlying opinion, we noted that respondent's theory of attributing the entire amount of the grants at issue to petitioner's self-dealing "might be acceptable if the evidence demonstrated that petitioner was the mastermind behind the issuance of the grants at issue." 31995 Tax Ct. Memo LEXIS 437">448 We found, however, that petitioner's association with these organizations was often conducted through, or influenced by, individuals who took advantage of petitioner's nature. They insinuated themselves into petitioner's confidence and then utilized him to assist in obtaining Moody Foundation funds for themselves, their associates, or their pet projects. As described by a senior member of the Moody Foundation staff, one such individual "was a con man, and he had done a number on--he had Shearn convinced that he was the next thing to God." As to another such individual, the underlying opinion notes that: "By all accounts, [the individual] was aggressive and strong-willed and dominated the relationship with petitioner." In the underlying opinion, we stated Our impression of petitioner in this case is that he is reasonably intelligent, but naive and given to conspiracy theories. He is generous, but he trusts too readily those who are forceful or persuasive or who tell him what he likes to hear. He is garrulous, and he has difficulty in concentrating on the matter at hand. He has demonstrated no practical appreciation for the amounts of money involved in the various grants at issue, 1995 Tax Ct. Memo LEXIS 437">449 nor has he demonstrated anything approaching even an adequate business sense.In view of our conclusion, we determined that petitioner was not the mastermind behind the grant of Moody Foundation moneys to the grantee entities with which he was involved. As we explained: We conclude that others brought about the misuse of Moody Foundation funds after the awards were made. Petitioner was not a mastermind; rather he was manipulated by those who sought to get Moody Foundation money.This general conclusion was subject to some notable exceptions. On a number of occasions, money from the grants at issue went to the benefit of petitioner or, at his behest, to his friends and associates. Our findings accordingly specified a number of instances wherein moneys from the Moody Foundation were directly or indirectly transferred to petitioner, or used by him or for his benefit. We held that the excise taxes imposed by section 4941(a)(1) and (b)(1) for acts of self-dealing were properly imposed upon petitioner for these amounts. As to the other amounts, respondent presented substantial evidence, in the form of testimony of participants in the grantee organizations, or in the grant 1995 Tax Ct. Memo LEXIS 437">450 process. Some of that evidence offered general support for respondent's contention that petitioner understood and participated in the misuse of Moody Foundation funds. The evidence was plausible; it was not perjured nor inherently incredible. We nevertheless found that respondent's evidence was outweighed by other evidence. The principal factor in evaluating that other evidence was once again our perception of petitioner's nature and general capabilities. Also important was our evaluation of other participants' testimony. Our evaluation took into account their possible self-interest in deflecting blame from themselves for the misuse of Moody Foundation assets. We also considered the positions of those witnesses with respect to petitioner, the grantee organizations, and the Moody Foundation itself. We noted their awareness, or lack thereof, of other pertinent facts and circumstances. Our findings in this regard were not made easily. We recognized that respondent's position has a reasonable basis in the evidence. That we may ultimately have reached different conclusions as to the testimony of participants does not mean that respondent's decisions to present such testimony is unreasonable. 1995 Tax Ct. Memo LEXIS 437">451 As one court has explained, "when resolution of a case hinges to such an extent on determination of witness credibility, it is an abuse of discretion to find that the government's position was not substantially justified". Wilfong v. United States, 991 F.2d 359">991 F.2d at 368. Petitioner's Willful or Flagrant ConductRespondent also asserted that petitioner was liable on two other bases. The first of these was section 4941(a)(2), which imposes an excise tax upon a foundation manager who participates in an act of self-dealing between a disqualified person and a private foundation. To prevail on this issue, respondent was required to prove that the foundation manager acted knowingly and that his participation was willful and not due to reasonable cause. We held that, with a few exceptions, respondent had not met the high burden of proof needed to impose liability upon petitioner, in his status as a foundation manager, under this section. We also found, however, that there were instances wherein respondent had shown, with clear and convincing evidence, that petitioner acted knowingly, willfully, and without reasonable cause in acts of self-dealing. Section1995 Tax Ct. Memo LEXIS 437">452 6684(2) imposes a penalty upon a person who becomes liable for a tax under section 4941 for actions that are willful and flagrant, and not due to reasonable cause. Respondent also bears the burden of establishing liability under section 6684(2). We found that those instances for which additions to tax under section 6684(2) should be imposed are the same as those that subjected petitioner to the foundation manager excise taxes under section 4941(a)(2). For reasons already discussed, we hold that respondent's assertion of petitioner's liability under sections 4941(a)(2) and 6684(2) was substantially justified. If petitioner had "masterminded" obtaining and expending the amounts at issue, respondent would have a strong case for imposing liability under those provisions. The question of petitioner's role as a mastermind was, again, a question of credibility. Respondent presented relevant and plausible testimony that, if accepted, would have furnished a basis for finding that petitioner acted willfully, and even flagrantly. In the underlying opinion, we stated: "We readily understand respondent's suspicions as to petitioner's knowing participation in the acts of self-dealing involved 1995 Tax Ct. Memo LEXIS 437">*453 here." We nevertheless found respondent's evidence insufficient to overcome other evidence that the misuse of Moody Foundation funds was due to the actions of others, who exploited petitioner's idiosyncrasies and naivete. Thus, with a few exceptions, we found that petitioner had not engaged in the willful or flagrant actions required to bring about liability under sections 4941(a)(2) or 6684(2). In sum, respondent was fully justified in attempting to prove petitioner's liability for the amounts in issue; that we found such proof insufficient does not mean that the effort was unjustified. As a final matter we note that respondent, at trial, conceded her administrative determination of deficiencies under sections 4941(b)(2) and 4945(a) and (b). Petitioner, in his motion for litigation and administrative costs, does not contend that these determinations were not substantially justified within the meaning of section 7430. We endorse petitioner's decision not to have made such a contention. See Price v. Commissioner, 102 T.C. 660">102 T.C. 660, 102 T.C. 660">664-665 (1994). In view of the foregoing, Appropriate orders and decisions will be entered. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. For civil tax actions or proceedings commenced after Dec. 31, 1985, sec. 1551(d)(1) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2752, changed the language describing the position of the United States from "was unreasonable" to "was not substantially justified". This and other courts, however, have held that the "substantially justified" standard is not a departure from the previous reasonableness standard. Bragg v. Commissioner, 102 T.C. 715">102 T.C. 715, 102 T.C. 715">717 n.2 (1994); Sokol v. Commissioner, 92 T.C. 760">92 T.C. 760, 92 T.C. 760">763-764↩ n.7 (1989).3. Our underlying opinion recognizes that some of the grant moneys at issue were expended for purposes that were consistent with Moody Foundation charitable guidelines. Notwithstanding the semantics of her argument, respondent also recognized that fact. At least to some extent, she took those "proper" expenditures into account in making the determinations there at issue. It must also be noted that the evidence reveals a multitude of questionable transactions and a pervasive misuse of Moody Foundation funds. Thus, respondent was substantially justified in putting petitioner to his proof as to the exclusion from the "amount involved" of other amounts allegedly expended for proper purposes. We note that petitioner's motion papers do not specify which of any allegedly proper expenditures respondent may have unreasonably included in the "amount involved".↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620851/	Howard S. Pulliam v. Commissioner.Pulliam v. CommissionerDocket No. 6443-69.United States Tax CourtT.C. Memo 1971-121; 1971 Tax Ct. Memo LEXIS 208; 30 T.C.M. 512; T.C.M. (RIA) 71121; May 27, 1971, Filed 1971 Tax Ct. Memo LEXIS 208">208 Respondent reconstructed petitioner's income for 1964 and 1965 by using the source and application of funds method and determined that petitioner had unreported income in those years of $11,847.27 and $6,823.28, respectively. Held: Petitioner failed to carry his burden of proving error, and respondent's determination is sustained. Held, further: Respondent properly increased petitioner's 1966 long-term capital gain from the sale of properties by excluding the cost of certain alleged improvements and furnishings from petitioner's basis in the properties sold. Held, further: Petitioner is entitled to deduct in 1966 certain expenses in connection with his rental properties in excess of the amount allowed by the respondent; Cohan rule applied. Held, further: Petitioner is liable for the addition to tax under section 6651(a) in 1964 because he failed to prove that his failure to timely file his 1964 return was due to reasonable cause. 68, Jeffersonville, Ind. Frederick W. Howard S. Pulliam, pro se, Route #2, Box k/rieg, for the respondent. HOYTMemorandum Findings of Fact and Opinion HOYT, Judge: Respondent determined deficiencies in petitioner's income tax for the years 1964, 1965, and 1966 in the amounts of $2,703.27, $1,271.21, and $1,364.31, respectively, and imposed an addition to tax under section 6651(a) for 1964 in the amount of $675.82. The issues presented for our decision are as follows: (1) Whether petitioner had unreported income of $11,847.27 and $6,823.28 in 1964 and 1965, respectively. 513 (2) Whether respondent properly increased petitioner's 1966 long-term capital gain from the sale of properties by excluding the cost of certain alleged improvements and furnishings from petitioner's basis in the properties sold. (3) Whether petitioner is entitled to deduct in 1966 certain expenses in connection with his rental properties in excess of the amount allowed by respondent. (4) Whether petitioner is liable for the addition to1971 Tax Ct. Memo LEXIS 208">210 tax in 1964 for failure to timely file his 1964 return within the time prescribed by law. Findings of Fact Howard S. Pulliam, petitioner herein, is an individual who resided in Lexington, Kentucky, at the time of the filing of his petition in this case. Petitioner's tax returns for the years 1965 and 1966 were filed with the director of internal revenue, Lousiville, Kentucky; his 1964 return was never filed. In his retained unsigned copy of his 1964 tax return petitioner stated that he had rental income only, that his total income was $786.77 and that no tax was due. In a schedule attached to reflect rental income and expenses, gross rent and gross income of $6,640 were reported and itemized expenses of $5,853.23 were claimed. In his 1965 tax return petitioner reported gross rental income (as his only income) of $6,716 and itemized expenses of $6,801.88, so that his total income reported was a loss of $85.88. In his notice of deficiency for the years in issue, respondent made the following determination with respect to petitioner's 1964 and 1965 taxable years: (a) In the absence of adequate records, your taxable income for the years 1964 and 1965 has been computed by the1971 Tax Ct. Memo LEXIS 208">211 source and application of funds method. Thus your taxable income is increased by the amounts of $11,847.27 and $6,823.28 for the taxable years 1964 and 1965, respectively, as computed in Exhibit A attached hereto and made a part hereof. Exhibit A to the notice of deficiency stated as follows: 19641965Application of FundsFirst National Bank Loan - 1962 Oldsmobile$ 1,254.62Commercial Credit Corporation - 1964 Mercedes Benz #395443.10$ 1,624.70Commercial Credit Corporation - 1964 Mercedes Benz #99431.17114.29Down Payment - Mercedes Benz car2,000.00First Security Nat'l Bank - Volvo Auto loan1,181.881,280.37Bank of Commerce - Loan payments1,133.001,236.00Increase - Bank of Commerce checking acocunt102.02Personal living expenses 6,523.486,523.48Total funds applied$12,669.27$10,778.84Source of Funds Bank of Commerce - Loan 10-13-65$ 3,000.00Decrease - Bank of Commerce checking account185.78Total0$ 3,185.78Funds not accounted for (income)$12,669.27$ 7,593.06Less: Allowable depreciation on rental properties 822.00855.66Income corrected$11,847.27$ 6,737.40Income reported on returns 0(85.88)Unreported income $11,847.27$ 6,823.281971 Tax Ct. Memo LEXIS 208">212 On his income tax return for the year 1966 petitioner reported gross rental income of $3,565 and itemized rental expenses of $3,216.95, with a resulting net rental income of $348.05. He also reported on a separate Schedule D, the sale on April 1, 1966, of several pieces of real property for a gross sales price of $49,500. On his return petitioner computed his basis for two of those properties as follows: Apartment, 222 N. Upper St.Purchased 1958, cost at purchase$4,500Lot2.000Furnishings sold1,500Basis $ 8,000120 Mechanic St.Purchase 1958, cost7,500Lot2,500Improvements 1,200Basis $11,200 514 He then reported a net gain of $22,374.41 from the sales made in 1966, and included $11,187.20, one-half thereof, in his income. In his notice of deficiency for the year 1966, respondent determined that petitioner realized long-term capital gain of $12,537.20 from the sale of properties during 1966 instead of the amount of $11,187.20 which petitioner had reported. Respondent arrived at this determination by reducing petitioner's "cost or other basis" by the claimed $1,200 in improvements on the property at 120 Mechanic Street, and1971 Tax Ct. Memo LEXIS 208">213 also by the $1,500 in claimed furnishings sold at 222 N. Upper Street. At the trial petitioner admitted that he did not sell any furnishings when the property at 222 N. Upper Street was sold. No evidence was presented with respect to the $1,200 claimed as improvements on the property at 120 Mechanic Street. On his 1966 income tax return petitioner claimed the following business expense deductions with regard to certain rental properties which he owned in that year: Repairs to kitchens and bathrooms$ 390.00Repairs to air conditioning504.00Fire insurance178.00Water, gas & utilities furnished tenants$1,285.71City Taxes485.81County & State taxes54.79Plumbing repairs196.35Electrical repairs49.29Pest control 73.00Total $3,216.95 In his notice of deficiency respondent disallowed these deductions to the extent of $2,676.35, and allowed only the deduction of $540.60, representing the amount petitioner claimed for city, county, and state taxes on his rental properties. Petitioner paid and incurred deductible expenses in connection with his rental properties during 1966 in the following amounts: Water, gas, and utilities furnished tenants$ 680.75Miscellaneous repairs and mainte- nance534.55City, county, and state taxes540.60Insurance 119.78Total deductible expenses $1,875.681971 Tax Ct. Memo LEXIS 208">214 Ultimate Findings of Fact Petitioner's 1964 income tax return was not filed within the time prescribed by law. Petitioner failed to prove that his failure to timely file his 1964 return was due to reasonable cause rather than to willful neglect. Respondent's calculations with regard to the "application of funds" for 1964 and 1965 are reasonable. Petitioner failed to report $11,847.27 and $6,823.28 as taxable income for the years 1964 and 1965, respectively. Opinion The first issue for our decision is whether respondent properly determined that petitioner had unreported income in the amounts of $11,874.27 and $6,823.28 in 1964 and 1965, respectively. Respondent arrived at his calculations of petitioner's income for those years by using the source and application of funds method for reconstructing income. Respondent determined the minimum amount of cash expenditures made by petitioner in 1964 and 1965 and, after deducting therefrom all cash available to petitioner from known sources and certain allowable depreciation deductions, determined that the remainder of the cash spent by petitioner in those years represented unreported income. The respondent's determination is presumptively1971 Tax Ct. Memo LEXIS 208">215 correct, and the petitioner has the burden of overcoming this presumption. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 32, Rules of Practice, United States Tax Court. Petitioner's only serious objections to the respondent's determination seem to be to the latter's calculation of the amounts which petitioner spent during the years 1964 and 1965. However, all of these expenditures, which are listed in our findings of fact under the heading "Application of Funds," with the exception of the "personal living expenses," are either admittedly correct or clearly established by the evidence. In addition, we conclude that petitioner has failed to prove that respondent's estimate for petitioner's personal living expenses during the years in issue was incorrect. We have found that the respondent's calculations with regard to the application of funds are reasonable, and we are not persuaded by petitioner's unsupported self serving testimony to the effect that he had no personal living expenses in 1964 and 1965. Such vague and general flat conclusory assertions, unsupported by any other evidence whatever, are not convincing. Having observed him on the witness stand and having carefully1971 Tax Ct. Memo LEXIS 208">216 considered his testimony about his personal expenses in the light of all of the 515 other evidence of record, we conclude that petitioner has not carried his burden of proof to establish that respondent erred in his determination that petitioner's personal living expenses were $6,523.48 in each year. See Geiger v. Commissioner, 440 F.2d 688 (C.A. 9, April 11, 1971), affirming a Memorandum Opinion of this Court. Petitioner has failed to rebut the presumptive correctness of the respondent's determinations regarding either the amounts petitioner spent during the taxable years in issue or the sources of his funds in those years. Therefore, we must conclude and hold that respondent properly increased petitioner's taxable income in the respective amounts of $11,847.27 and $6,823.28 in 1964 and 1965. The next issue for our consideration is whether respondent properly determined that petitioner realized long-term capital gain of $12,537.20 from the sale of properties during 1966 instead of the amount of $11,187.20 which petitioner had reported. Respondent arrived at this determination by reducing petitioner's "cost or other basis" for the 120 Mechanic Street property1971 Tax Ct. Memo LEXIS 208">217 by $1,200 which petitioner claimed as improvements, and by reducing his basis in the 222 N. Upper Street property by $1,500 claimed as the cost of furnishings sold with that property. The burden rests upon the petitioner to show error in this determination. At the trial petitioner admitted that he did not sell any furnishings when the property at 222 N. Upper Street was sold. We therefore must hold that petitioner should not have included the cost of such furnishings in his adjusted basis for that property and respondent's determination is sustained. No evidence was presented with respect to the $1,200 claimed as improvements on the property at 120 Mechanic Street. Since petitioner has clearly failed to carry his burden of proof, we hold that respondent's determination regarding this issue must also be sustained. The next issue for our decision is whether respondent properly disallowed a portion of the $3,216.95 in business expense deductions claimed by petitioner on his 1966 income tax return with regard to certain rental properties which he owned in that year. Respondent disallowed these deductions to the extent of $2,676.35, and allowed only the deduction of $540.60, representing1971 Tax Ct. Memo LEXIS 208">218 the amount petitioner claimed for city, county, and state taxes on his rental properties. We are convinced that petitioner paid and incurred certain expenses for his rental properties in excess of the amount allowed by the respondent. However, the record is far from precise as to the amount of the expenses which petitioner actually incurred during 1966. Bearing heavily against the petitioner, whose inexactitude is of his own making, and applying the rule of Cohan v. Commissioner, 39 F.2d 540 (C.A. 2, 1930), we conclude and hold that petitioner is entitled to deduct the following amounts in 1966 as ordinary and necessary business expenses for his rental properties: Water, gas, and utilities furnished tenants$ 680.75Miscellaneous repairs and maintenance expenses534.55City, county, and state taxes540.60Insurance 119.78Total $1,875.68 The only issue remaining for our consideration is whether respondent was correct in imposing the addition to tax in 1964 under section 6651(a), I.R.C. 1954. A taxpayer is liable for a penalty under that section if his income tax return was not filed within the time prescribed by law unless he can prove1971 Tax Ct. Memo LEXIS 208">*219 that his delinquent filing was due to reasonable cause and not to willful neglect. We cannot conclude from the evidence adduced at trial that petitioner's 1964 return was timely filed. Indeed the evidence of record indicates that it was never filed. Petitioner himself merely assumed that it probably had been filed because his tax advisor "always" mailed his returns. He did not call his advisor as a witness and his own testimony was vague and uncertain at best. Petitioner has failed to prove that his failure to timely file his 1964 return was due to reasonable cause rather than to willful neglect. Therefore, we must conclude and hold that petitioner is liable for the addition to tax in 1964 under section 6651(a), and respondent's determination is sustained in that respect also. To reflect the necessary adjustments required by this opinion, Decision will be entered under Rule 50. 516	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620826/	MARGARET P. DALY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Daly v. CommissionerDocket No. 65213.United States Board of Tax Appeals32 B.T.A. 965; 1935 BTA LEXIS 865; July 17, 1935, Promulgated 1935 BTA LEXIS 865">865 DISTRIBUTION BY CORPORATION - SURPLUS - DEPLETION RESERVE. - Where a corporation properly set aside out of earnings amounts representing depletion based upon discovery value, and in subsequent years had losses in excess of its surplus balance, it is held that such excess effected a reduction of the depletion reserve and that earnings subsequently realized may not be applied to restore that reserve but represent surplus available for dividend distribution. C. J. McGuire, Esq., and J. Marvin Haynes, Esq., for the petitioner. T. M. Mather, Esq., for the respondent. LEECH32 B.T.A. 965">965 OPINION. LEECH: Respondent has determined a deficiency in income tax for the calendar year 1929 of $6,008.41. Petitioner contends that the tax for the year in question has been overpaid in the amount of $7,134.17. Only two issues are submitted for our determination: (a) the inclusion by respondent in taxable income of an amount representing the market value of certain rights to subscribe to the bonds of the American Telephone & Telegraph Co., such rights having been received by petitioner as a stockholder of that company, and (b) the inclusion in income of1935 BTA LEXIS 865">866 $45,038.66 received by petitioner as a stockholder from the Cinco Minas Co.The facts are stipulated and are set out here only to the extent necessary to an understanding of the issues. The question raised with respect to stock rights received by petitioner requires little discussion. Petitioner exercised these rights and did not dispose of them. Under such circumstances the issue is controlled by our decision in , and . We hold that the value of these rights did not represent taxable income to petitioner. The second issue arises from respondent's including in petitioner's taxable income for 1929, $45,038.66 of a total distribution of $56,666.66, made to petitioner by the Cinco Minas Co. in 1929 as the owner of 1,416 2/3 shares of the capital stock of that company. Respondent has determined that the payment was made from surplus to the extent included in income by him. Petitioner contends that the company had no surplus at the time of distribution and that it was made from a depletion reserve, based upon discovery value, set up out of earnings. The parties are in agreement as1935 BTA LEXIS 865">867 to the facts 32 B.T.A. 965">966 and figures. Their dispute is upon the correct method of computing the undistributed surplus of the company earned subsequent to March 1, 1913, and available for dividend distribution. It is agreed that the company was entitled to discovery value upon certain of its mines, developed subsequent to March 1, 1913, and that depletion was properly reserved from earnings in subsequent years. In years following those from the earnings of which depletion allowances were reserved, the company had certain losses and then in still later years earnings were realized. Respondent, in computing corporate surplus available for dividend distribution in 1929, has applied those corporate losses against existing surplus to the extent of that surplus and has applied the balance of such loss in each case to reduce the undistributed reserve for depletion. The net earnings of the later years he has treated as surplus without applying any portion of them to restore the depletion reserve. Petitioner computed existing surplus by charging to that account only the amount by which net earnings exceeded the undiminished reserve for depletion. It is her contention that the losses, 1935 BTA LEXIS 865">868 incurred in excess of the surplus balance, should be used only to create a deficit in surplus or, if applied against the depletion reserve, the latter should be restored from later earnings and only the excess of such earnings over the amount used in such restoration, should be charged to earned surplus. Stating the matter simply, it is petitioner's contention that the reserve for depletion based upon discovery value constituted capital, whereas respondent contends that it represents merely an appreciation in value which Congress has permitted the corporation to realize free of tax and the fact that under section 115(d) of the Revenue Act of 1928, it is permitted to be distributed free of tax to the corporate stockholders under certain conditions in no wise changes its basic character as earnings or profits. Section 115 of the Revenue Act of 1928 defines the term "dividend" as "any distribution made by a corporation to its shareholders, whether in money or other property, out of its earnings or profits accumulated after February 28, 1913" and then provides: SEC. 115. (b) Source of distributions. - For the purposes of this Act every distribution is made out of earnings or1935 BTA LEXIS 865">869 profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 113. We have considered the question of whether a depletion reserve based on discovery value represents earnings or profits. In , arising under the 1921 Act, we held that such a reserve, substantially in excess of the cost or March 1, 1913, value, represented, to the extent of such excess, earnings or profits accumulated, subsequent to 1913 and distributions therefrom represented taxable dividends. The present question arises under the Revenue Act of 1928, section 115(d) of which provides: SEC. 115. (d) Other distributions from capital. - If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property1935 BTA LEXIS 865">870 accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this subsection shall also apply to distributions from depletion reserves based on the discovery value of mines. It is the contention of petitioner that this provision, which permits the distribution, free of tax in the hands of the stockholders, of so much of a depletion reserve of this character as is not in excess of the cost basis of the stock and taxes the excess as gain and not a dividend, has the effect of making such a depletion reserve, for all purposes, capital of the corporation. It is further urged that a reserve for depletion is, in fact, capital, being merely a return of the capital asset and not gain in the ordinary sense. A question similar in many respects was presented in , involving distributions made in 1928, by a corporation having a substantial surplus at March 1, 1913. 1935 BTA LEXIS 865">871 Subsequent to 1913 there were losses in two years, followed by yearly profits realized to the date of the distribution. In that case it was urged that the surplus existing at March 1, 1913, free of tax by legislative grace, should be considered as capital which, if reduced by subsequent losses, was entitled to restoration from later earnings and that only the excess of such earnings, after such restoration, constituted surplus accumulated subsequent to March 1, 1913, subject to distribution as dividends. The same argument is made here as to amounts set aside from earnings. In disposing of this contention in the Canfield case, the Court said: The argument that the surplus of March 1, 1913, constituted capital is unavailing. We are not here concerned with capital in the sense of fixed or paid-in capital, which is not to be impaired, or with the restoration of such capital where there has been impairment. No case of impairment of capital is presented. We are dealing with a distribution of accumulated profits. Nor is it important that the accumulated profits, as they stood on March 1, 1913, constituted capital of the company as distinguished from the gains or income which1935 BTA LEXIS 865">872 the company subsequently realized. When a corporation continued in business after March 1, 1913, the dividends it later declared and paid to its stockholders, whether out of current earnings or from profits accumulated prior 32 B.T.A. 965">968 to that date, constituted income to the stockholders, and not capital, and were taxable as income if the Congress saw fit to impose the tax. . The provision of the Act of Congress under consideration was a "concession to the equity of stockholders" with respect to receipts as to which they had no constitutional immunity. There is no question here of the receipt of "capital." We think the reasoning of the opinion in the Canfield case applies with equal, if not greater force, to the situation present here. There the question involved the surplus realized and existing at March 1, 1913, while here we have gains representing appreciation of properties after that date and realized subsequent thereto, taxable both to the corporation when realized and to the stockholder when distributed except for the fact that Congress has exempted them from tax by granting what is, in the language of the Court in1935 BTA LEXIS 865">873 the cited case, "a 'concession to the equity of the stockholders' with respect to receipts as to which they had no constitutional immunity." As in the Canfield case, with respect to accumulations of surplus, we can see in the statutory provisions here exempting depletion allowances based on discovery value from tax to the corporation, no intent on the part of Congress to ascribe to such depletion, in excess of cost, the character of invested capital as a fixed basis upon which corporate net surplus is to be computed. As the Court said in that case: * * * To attribute to the accumulated profits or surplus of March 1, 1913, embarked in a continued business, such a static condition is to ignore the course of business and to impute to the Congress an intention to consider, for tax purposes, the existence of that surplus as still continued notwithstanding its actual diminution or exhaustion. Such an intention to disregard realities so as to afford immunity from a tax is not lightly to be ascribed to the taxing authority. * * * In our opinion, this rule is applicable to the situation now before us. The allowances for depletion, based upon discovery value and set aside out of1935 BTA LEXIS 865">*874 the earnings, are, to the extent that they exceed cost, surplus of the corporation which has been accorded nothing more than tax exemption upon its realization. Respondent's determination of corporate surplus available for distribution in 1929 is correct. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620827/	ELMARS P. EZERINS and GLORIA J. EZERINS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentEzerins v. CommissionerDocket No. 3842-83.United States Tax CourtT.C. Memo 1984-261; 1984 Tax Ct. Memo LEXIS 417; 48 T.C.M. 107; T.C.M. (RIA) 84261; May 14, 1984. Elmars P. Ezerins, pro se. Steven R. Guest, for the respondent. COHENMEMORANDUM FINDINGS OF FACT AND OPINION COHEN, Judge: Respondent determined a deficiency of $1,606 in petitioners' Federal income taxes for 1980. The deficiency resulted from the determination that petitioners had unreported interest income, which they have not contested, and from disallowance of an alleged theft loss. FINDINGS OF FACT Petitioners were residents of Wisconsin at the time they filed their petition herein. Prior to January 1980, Mr. Ezerins (petitioner) purchased silver (not silver clad) coins for cash. The total face value of the coins purchased was approximately $1,500. He generally paid between 10 and 35 percent over the face value1984 Tax Ct. Memo LEXIS 417">418 of the coins. He did not maintain records of the coins purchased. The coins were kept in petitioner's home under his bed and in a small unlocked filing cabinet.In early January 1980, petitioner received a telephone call from a police officer who stated that a neighborhood boy by the name of Dave had been picked up by the police and had in his possession a large quantity of coins. Dave was a friend of petitioner's son and had stayed in petitioner's home overnight on a couple of occasions. Petitioner had been identified as a possible source of the coins. Petitioner then discovered that his coins were missing. Upon learning that the face value of the coins then in Dave's possession was only approximately $300, petitioner decided not to press charges against Dave. He did, however, speak to Dave's mother.Dave's mother told petitioner that petitioner's son had come to the house and tried to intimidate Dave with a gun. Petitioner then decided to abandon his attempt to recover the coins because of the small amount involved. On their income tax return for 1980, petitioners claimed a theft loss of $8,566. A statement attached to the return calculated a loss of $51,390 based on the1984 Tax Ct. Memo LEXIS 417">419 per ounce price of silver as of January 5-7, 1980. According to that statement, petitioners decided to spread that loss over 6 years. OPINION Section 165 1 allows a deduction for a loss from theft discovered during the taxable year to the extent that such loss exceeds $100 and is not reimbursed by insurance. The amount of the loss for this purpose is the lesser of the fair market value of the property immediately before the loss or the adjusted basis of the property. Sec. 1.165-8, Income Tax Regs. Petitioner has the burden of proving his entitlement to the deduction. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.It appears that the market value of silver coins in January 1980 was substantially higher than the face value of the coins or petitioner's cost basis in the coins. Petitioners contend that they are entitled to deduct the market value of the coins. The applicable law, however, limits their deduction to their cost. Sections 165(b), 1011, 1984 Tax Ct. Memo LEXIS 417">420 1012. There is no authority for or merit to petitioners' assertion that a different rule applies to silver coins. Petitioners cannot use the untaxed appreciated value of the coins in arriving at a loss to be offset against their taxable income. See Escofil v. Commissioner,464 F.2d 358">464 F.2d 358, 464 F.2d 358">359 (3d Cir. 1972), affg. a Memorandum Opinion of this Court; Gabsa v. Commissioner,T.C. Memo. 1982-48. Petitioner's testimony in this case, although vague, does satisfy his burden of proving that he had coins and that he sustained a loss by theft discovered in 1980. The absence of adequate records, however, makes it difficult to determine his basis in the stolen coins. Our duty, therefore, is to make as close an approximation as we can of his loss, weighing heavily against the taxpayer because the inexactitude is of his own making. Cohan v. Commissioner,39 F.2d 540">39 F.2d 540 (2d Cir. 1930). Reviewing and weighing petitioner's testimony, we conclude that he is entitled to a theft loss deduction of $1,700 ($1,800 cost less $100). 21984 Tax Ct. Memo LEXIS 417">421 Decision will be entered under Rule 155.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended and in effect during the year here in issue.↩2. Only the year 1980 is before us in this case. It seems obvious, however, that petitioner may not claim a theft loss in any other year in relation to the coins discovered missing in 1980.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620828/	JORDAN K. SMITH and MARY F. SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent EDWARD SMITH and MODINE SMITH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentSmith v. CommissionerDocket Nos. 9078-76, 9079-76.United States Tax CourtT.C. Memo 1978-416; 1978 Tax Ct. Memo LEXIS 101; 37 T.C.M. 1731; T.C.M. (RIA) 78416; October 16, 1978, Filed 1978 Tax Ct. Memo LEXIS 101">101 Held, property determined to be a partnership asset.Held further, the sec. 1033, I.R.C. 1954, election with respect to involuntarily converted partnership property is open only to the partnership; therefore, reinvestment by the partners individually does not qualify for nonrecognition. Paul E. Anderson, for the petitioners. 1978 Tax Ct. Memo LEXIS 101">102 Robert E. Casey, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined the following deficiencies in petitioners' Federal income taxes: Docket No.YearDeficiency9078-761972$ 10,285.009079-7619729,029.00The issues are whether certain property was a partnership asset and, if so, whether the individual partners' reinvestment in property similar to the involuntarily converted partnership asset qualifies under the nonrecognition provisions of section 1033. 1FINDINGS OF FACT Some facts were stipulated and are found accordingly. Jordan and Mary Smith and Edward and Modine Smith, husbands and wives, were legal residents of Novato and Escalon, California, respectively, when they filed their returns with the Internal Revenue Service Center, Fresno, California, and when they filed their petitions in this case. Jordan and Edward Smith are the two remaining partners in Smith Brothers, a calendar year partnership formed in 1943. Smith Brothers is now and was at all times material herein a California1978 Tax Ct. Memo LEXIS 101">103 partnership. At all times prior to mid-1969, the principal business activity of the partnership was the operation of a dairy ranch business. Smith Brothers filed a partnership return reflecting its operations in 1972. From 1943 to mid-1969, the partnership actively conducted its dairy operations on property known as Gallinas Ranch. In 1965 this property, originally owned by petitioners' relatives, was conveyed to Jordan and Edward Smith as tenants in common; however, it has been listed on the partnership books as a partnership asset since 1943. The property was scheduled and included as an asset on the partnership balance sheets filed with the partnership income tax returns. The partnership has reported its income derived and expenses incurred from the operation of its business activities on this property. All real property taxes assessed against the Gallinas Ranch were paid by the partnership. Because Gallinas Ranch was adjacent to San Francisco Bay, it was virtually impossible for the partnership to conduct its business thereon without polluting Bay water. As a consequence, California issued a cease and desist order to the partnership in 1968. The partnership thereafter1978 Tax Ct. Memo LEXIS 101">104 commenced business on other property and terminated its business operations on Gallinas Ranch in mid-1969. On May 15, 1972, the County sought to condemn the Gallinas Ranch for park purposes. This action was resolved on June 22, 1972, when the County agreed to purchase part of the property for $ 98,400 and lease the remaining part with a purchase option. The sale was consummated on or about September 1, 1972. Thereafter, the sale proceeds were distributed to Jordan and Edward Smith. In January 1972, JordanSmith purchased $ 52,500 of improved real property (three condominium units) which was titled jointly with his wife. In December 1974, he purchased $ 280,000 of improved real property (real property with a bank thereon) which was titled in his name only. In July 1973, Edward Smith purchased $ 54,000 of unimproved real property; while title was taken jointly with his wife, the property is his sole and separate property. The partnership did not purchase any real property in its own name within the period prescribed by section 1033. On its December 31, 1972, balance sheet, filed with its 1972 return, the partnership reflected the $ 84,900 gain on the sale portion of1978 Tax Ct. Memo LEXIS 101">105 the Gallinas Ranch transaction as a deferred income liability. Neither of the petitioners included any portion of the gain realized on the sale portion of the Gallinas Ranch transaction in their 1972 returns. Respondent determined that the Smith Brothers partnership should have reported the $ 84,900 gain as ataxable event in 1972 since the partnership did not reinvest in qualified section 1033 property within the prescribed statutory time period. Accordingly, he increased each petitioner's 1972 distributive share of partnership capital gains. OPINION We must determine whether the Gallinas Ranch was partnership property 2 and, if so, whether the Smith Brothers partnership, rather than its individual partners, must reinvest in "property similar or related in service or use" to take advantage of the nonrecognition provisions of section 1033. 1978 Tax Ct. Memo LEXIS 101">106 Petitioners first contend that Gallinas Ranch was held as tenants in common by Jordan and Edward Smith; that it was not partnership property; and that, therefore, Jordan and Edward Smith properly reinvested in similar property to obtain the nonrecognition benefits of section 1033. Alternatively, they argue that even if the Gallinas Ranch was partnership property of Smith Brothers, they as individual partners were still entitled to individually reinvest the sale proceeds for purposes of section 1033 since tax liability is determined at their level. Respondent simply contends the property was partnership property and only the partnership may therefore elect to invoke section 1033. We agree with respondent. Section 1033(a) provides that if property is compulsorily or involuntarily converted into money and if the taxpayer purchases other property similar to the property converted, at the election of the taxpayer, the gain shall be recognized only to the extent that the amount realized upon the conversion exceeds the cost of the other property. Smith Brothers is a California partnership formed in 1943. Gallinas Ranch was placed on the partnership books and records as an asset1978 Tax Ct. Memo LEXIS 101">107 in 1943 and continuously remained thereon until sold in 1972 under threat of condemnation. During this period, the property was scheduled and included as an asset on the partnership balance sheets filed with and as part of the partnership returns. The partnership reported the income derived and expenses incurred from the operation of its business activities conducted on the Gallinas Ranch from 1943 through mid-1969. All real property taxes assessed against the property were paid by the partnership. Finally, the 1972 partnership return reported the $ 84,900 gain on the sale of the property as deferred income on its balance sheet. Under these circumstances we simply find no basis for holding that the Gallinas Ranch was not partnership property, notwithstanding the evidence of title as tenants in common to Jordan and Edward Smith. Petitioners argued in their brief that they "intended" that the property was not partnership property. There is no evidence in the record of such intent. Moreover, the best evidence of their "intent" is the method the property was treated on the partnership books--as partnership property. Finally, there is no evidence that Jordan and Edward Smith leased1978 Tax Ct. Memo LEXIS 101">108 the property to the partnership. Having found the Gallinas Ranch to be partnership property, we need only decide whether the partnership or the partners must make the section 1033 sale proceeds reinvestment. The Gallinas Ranch was partnership property. Upon a sale of a portion of the property, the proceeds were distributed to Jordan and Edward Smith who individually reinvested the proceeds in property they thought similar within the time period and meaning of section 1033. The partnership itself made no reinvestment within the time period of section 1033. Section 703(b) generally provides that any election affecting the computation of taxable income derived from a partnership shall be made by the partnership. Petitioners argue, however, that the partnership is not a taxable entity; that the partners in their individual capacity are liable for income taxes; and that, therefore, they individually should be allowed the benefits of section 1033. This argument was considered in Demirjian v. Commissioner,54 T.C. 1691">54 T.C. 1691, 54 T.C. 1691">1698-1701 (1970), affd. 457 F.2d 1 (3d Cir. 1972), and McManus v. Commissioner,65 T.C. 197">65 T.C. 197, 65 T.C. 197">216 (1975), appeal pending1978 Tax Ct. Memo LEXIS 101">*109 (9th Cir. 1976), where we held the partnership itself must make the election and qualifying reinvestment to obtain the nonrecognition benefits of section 1033. We see no need to repeat those cases here. Accordingly, we hold that since the Smith Brothers did not reinvest the proceeds of the Gallinas Ranch sale in similar property within the meaning of section 1033, it must report the gain in 1972. This gain is then reportable by its partners, Jordan and Edward Smith. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended.↩2. The parties stipulated that Smith Brothers is a partnership which actively conducted its business on the Gallinas Ranch. Thus, sec. 1.761-1(a), Income Tax Regs.↩, which refers to the existence of a partnership from holding property as tenants in common is irrelevant. The sole issue on this matter is whether Gallinas Ranch was an asset of the partnership--not whether Smith Brothers was a partnership.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620830/	MARY K. BECK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBeck v. CommissionerDocket No. 2250-81.United States Tax CourtT.C. Memo 1982-499; 1982 Tax Ct. Memo LEXIS 251; 44 T.C.M. 989; T.C.M. (RIA) 82499; August 30, 1982. 1982 Tax Ct. Memo LEXIS 251">251 Held: Mortgage payments made by petitioner's former husband on residence awarded to petitioner by divorce decree are not alimony under sec. 71. Harland M. Britz, for the petitioner. Joan J. Fahlgren, for the respondent. WHITAKERMEMORANDUM OPINION WHITAKER, Judge: Respondent determined deficiencies in petitioner's income tax for the years 1977 and 1978 in the amounts respectively of $516 and $517. The sole issue for decision is whether certain mortgage payments made by petitioner's former husband during these years are taxable to petitioner as alimony under section 71. 11982 Tax Ct. Memo LEXIS 251">252 The case was submitted fully stipulated. At the time the petition was filed, petitioner resided in Toledo, Ohio. Unfortunately, the facts set forth in the stipulation and supplemental stipulation are almost too attenuated for a decision to be made. 2 The pertinent facts, such as they are, reflect that petitioner and her husband were divorced by a judgment of an Ohio Court entered on October 14, 1975. The judgment allocated to petitioner the marital residence, title to which was then apparently in petitioner's husband's name, and directed the husband to continue to pay the then existing mortgage together with taxes and insurance. Petitioner was also awarded the contents of the house, the lawn equipment and her automobile. The husband was directed to continue to make health insurance available through his employment and to pay petitioner's attorney's fee, but no alimony was awarded. There is no evidence at all as to what other property or assets, if any, were owned by the husband or by petitioner, or as to the earning potential of either party. Petitioner's tax returns for 1977 and 1978 show that she earned a modest income in each of these years. The supplemental stipulation1982 Tax Ct. Memo LEXIS 251">253 recites that each party paid his or her own living expenses other than the mortgage payments, insurance and taxes, paid by the former husband. The parties have further stipulated that petitioner's former husband "continued to reside in the marital residence" through October 1978, although he was directed by the divorce decree to vacate the premises. We do not know what significance, if any, we should attach to the word "reside," especially in view of the item next mentioned. Finally, the stipulation includes a copy of a document which purports to be a letter dated November 22, 1978, from the former husband's attorney to petitioner charging that because the parties "never ceased living together as husband and wife," the divorce decree was a sham and could be set aside. While the parties have stipulated that this document is a copy of a letter1982 Tax Ct. Memo LEXIS 251">254 from the former husband's attorney to petitioner, they have not agreed, as we interpret the stipulation, that the facts set out in the attorney's letter are correct. Therefore, we accept this document merely for what it purports to be, an attorney's negotiating proposal. We do not accept as facts the statements in the letter; 3 we do accept the 1975 divorce as valid and effective as of that date, in view of the language of the supplemental stipulation. We are left in this case with only the following operative facts: (1) Petitioner and her husband were divorced prior to the years in issue; (2) The decree of divorce, as part of the division of property, awarded the residence to petitioner and required petitioner's ex-husband to continue to make the mortgage payments and to pay taxes1982 Tax Ct. Memo LEXIS 251">255 and insurance; (3) Such payments were made during the years in issue by the former husband; (4) The divorce decree expressly declined to award alimony to petitioner; (5) During each of the years in issue petitioner earned approximately $10,000 and paid all of her living expenses other than mortgage payments, taxes and insurance. Petitioner argues at length that since the parties resided together "as husband and wife," based on the allegations in the attorney's letter which we do not accept as a fact, the mortgage payments were merely a contribution by the husband, or more properly ex-husband, to his own living expenses. Petitioner would have us hold that where divorced parties live together after the divorce, alimony ceases to be alimony. We consider this argument to be irrelevant since the facts as stipulated do not show that the parties cohabitated after divorce or that the divorce was a sham. Having disposed of the contention that there was no valid divorce, we must now decide whether or not the mortgage payments (and insurance and taxes) were incurred because of the marital or family relationship and were therefore taxable to petitioner under section 71(a)(1), as respondent1982 Tax Ct. Memo LEXIS 251">256 contends, or whether these payments by the former husband were part of the tax-free division of marital property in exchange for a release of petitioner's rights in her former husband's estate. 4 If the latter, then it is immaterial whether or not the payments constituted periodic payments because payable over a period of more than 10 years. See Blate v. Commissioner,34 T.C. 121">34 T.C. 121, 34 T.C. 121">127 (1960); section 1.71-1(b)(4), Income Tax Regs.51982 Tax Ct. Memo LEXIS 251">257 While we are not bound by the characterization of the payments by the parties or by the divorce court in the decree, 6 the characterization by the divorce court is one of the factors on which we may rely. Beard v. Commissioner,77 T.C. 1275">77 T.C. 1275, 77 T.C. 1275">1284 (1981). That factor clearly favors characterization of these payments as capital in nature. Respondent argues that the Ohio courts do not make a clear distinction between a division of property and alimony, which generally may be correct. Nevertheless, the divorce court here appears to have distinguished between the two. We have no basis for ignoring the plain language of this judgment. Another factor which tends to support characterization of the payments as capital is that they were fixed in amount and not subject to contingencies such as the death or remarriage of the recipient. See 77 T.C. 1275">Beard v. Commissioner,supra. While the facts as to the mortgage are not in evidence here, the implication of the divorce decree1982 Tax Ct. Memo LEXIS 251">258 is that the mortgage payments continue for a time certain. Such is obviously the almost universal custom and practice. While the decree is ambiguous as to the taxes and insurance, we construe the decree to require the payment of those items only so long as the mortgage remains unpaid, and not to require payment in perpetuity. With respect to all these payments, there is no evidence they would be discontinued in the event of death or remarriage of either party, which indicates they are in the nature of debts arising from the property settlement rather than alimony payments. See Sydnes v. Commissioner,68 T.C. 170">68 T.C. 170, 68 T.C. 170">176-177 (1977), affd. in part and revd. in part, 577 F.2d 60">577 F.2d 60 (8th Cir. 1978). Notwithstanding the fact that the insurance and taxes may vary slightly from year to year, these payments must be considered to be fixed in amount, which is also indicative of a property settlement. See 68 T.C. 170">Sydnes v. Commissioner,supra at 176-177. The evidence in the case is insufficient to enable us to make a determination as to any of the remaining seven factors by which we normally distinguish a property settlement from a support allowance. 1982 Tax Ct. Memo LEXIS 251">*259 See 77 T.C. 1275">Beard v. Commissioner,supra. While this determination is ultimately to be decided upon all the facts and circumstances in the particular case, 77 T.C. 1275">Beard v. Commissioner,supra, on the facts in this case we have no basis to go behind the divorce decree.8 Whether or not is was a sham, as charged by the former husband's attorney in 1978, is a matter of pure speculation. The meager facts presented here are sufficient to overcome the presumption of correctness of the statutory notice. Therefore, we find for petitioner. Decision will be entered for the petitioner.Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954, as amended.↩2. With a relatively modest expenditure of time and effort on the part of counsel for each of the parties, a reasonably adequate record might have been made available to the Court in this case. If a case of this sort is to consume the time of this Court, counsel have an obligation to prepare and submit a complete and satisfactory record.↩3. Prior to the filing of the supplemental stipulation, we advised both counsel that we would treat this document in this fashion in the absence of a stipulation as to the statements in the letter. We note that the supplemental stipulation states as a fact that the parties were divorced on October 14, 1975, thus confirming, at least for purposes of this record, the validity of the divorce.↩4. Mortgage payments relating to real property awarded in a divorce proceeding have in other cases been characterized by us as part of a property settlement. See, e.g., Sydnes v. Commissioner,68 T.C. 170">68 T.C. 170 (1977), revd. on another issue 577 F.2d 60">577 F.2d 60 (8th Cir. 1978); Sharp v. Commissioner,T.C. Memo. 1972-159; Stiles v. Commissioner,T.C. Memo. 1981-711↩. 5. See also Estate of Thoda v. Commissioner,T.C. Memo. 1979-219. We note that respondent apparently contends that the mortgage payments are periodic payments under section 71(c)(2) because payable over a period of more than 10 years. However, the only indication as to the remaining term of the mortgage is the statement in the statutory notice that the payments "were required to be paid for more than ten years." While the statutory notice is sufficient to put the burden of proof on petitioner under the Rules of this Court, Rule 142, Tax Court Rules of Practice and Procedure↩, the inclusion of the statutory notice as one of the stipulated documents is not tantamount to a stipulation that each of the allegations in the statutory notice may be taken as a fact for purposes of the decision in the case. Accordingly, we have no actual evidence as to whether the remaining term of the mortgage exceeded 10 years.6. Mirsky v. Commissioner,56 T.C. 664">56 T.C. 664 (1971); Joslin v. Commissioner,52 T.C. 231">52 T.C. 231, 52 T.C. 231">236 (1969), affd. 424 F.2d 1223">424 F.2d 1223↩ (7th Cir. 1970).8. See discussion in 56 T.C. 664">Mirsky v. Commissioner,supra at 674 and 675↩, as to the effect of language in a divorce decree. We note here that there is no ambiguity in the decree in this regard and we have no factual basis for any other characterization. Respondent's argument, based on language in the letter from the ex-husband's attorney, that the division of property "was not bargained for" is not based on anything in the record which we can properly consider.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620831/	Chester C. Hand, Sr., Petitioner, v. Commissioner of Internal Revenue, RespondentHand v. CommissionerDocket No. 29052United States Tax Court16 T.C. 1410; 1951 U.S. Tax Ct. LEXIS 153; June 21, 1951, Promulgated 1951 U.S. Tax Ct. LEXIS 153">153 Decision will be entered for the respondent. In the taxable year 1946, petitioner's income consisted of salaries received for services rendered as a teacher for the Board of Education, City of Chicago, in its day school and as a teacher for De Paul University, Chicago, in its night school. On his income tax return petitioner deducted from gross income under section 23 (a), I. R. C., $ 2,079.50 consisting of the following items: depreciation on automobile, $ 300; gas, oil, and car services, $ 250; car repairs, $ 142.50; car maintenance, $ 97.50; garage rent, $ 135; car insurance, $ 95; rent (three-fourths of household in lieu of rent), $ 675; telephone, stationery and miscellaneous, $ 162.50; carfare and miscellaneous, $ 19.50; light expenses, $ 55; and one-half miscellaneous household, $ 147.50. The Commissioner disallowed the foregoing deductions, stating in his deficiency notice, "Since you did not substantiate that you are an independent contractor, auto expense and household expenses have been disallowed." Held, during the taxable year petitioner was an employee as defined by section 22 (n) (1) of the Code and was not engaged in a trade or business under the provisions1951 U.S. Tax Ct. LEXIS 153">154 of section 23 (a) (1) of the Code. Held, further, as the traveling expenses paid by petitioner fail to satisfy the provisions of sections 23 (a) (1) (A) and 22 (n) (2), respondent did not err in disallowing the deductions claimed by petitioner as traveling expenses. Chester C. Hand, Sr., pro se.Paul Levin, Esq., for the respondent. Black, Judge. BLACK 16 T.C. 1410">1410 The Commissioner has determined a 1951 U.S. Tax Ct. LEXIS 153">155 deficiency in petitioner's income tax for the year 1946 of $ 525.73. The petitioner contests this determination by the following assignments of error:4. The determination of tax set forth in said notice of deficiency is based upon the following errors: a. The Commissioner erred in holding that petitioner was not an independent contractor, i. e., not in the practice of a profession, and in the disallowance as a deduction from gross income the amount of $ 2,221.50 claimed as a deduction by petitioner, in his return, as necessary expenses incurred in the production of a substantial portion of his income and in carrying on a trade or business, for the production or collection of income, and were deductible in accordance with Section 23 of the Internal Revenue Code.b. The Commissioner erred in disallowing petitioner's nonbusiness expense. The petitioner claims that interest as deducted is a proper deduction under "Federal Regulations on Income Tax" (June 1949 Edition) Sec. 29.23 (b)-1 (as amended byT. D. 5458, June 15, 1945); and that his deduction for taxes is a proper deduction under Same Citation (Sec. 29.23 (c)- 1951 U.S. Tax Ct. LEXIS 153">156 3). The petitioner claims that deductions for contributions were reasonable and adequately set forth and in accordance with the Internal Revenue Code. * * 16 T.C. 1410">1411 FINDINGS OF FACT.The petitioner is a married individual who, during the year 1946, resided with his wife and daughter at 2333 East 70th Place, Chicago, Illinois. The return for the period here involved was filed with the collector for the first district of Illinois.Petitioner for a good many years has been a teacher in the public schools of Chicago, Illinois. The salary or wages which he received from the Board of Education, City of Chicago, in 1946 was $ 3,842.87. Of this amount, the Board of Education, City of Chicago, withheld $ 454.10 as Federal income tax and at the proper time gave petitioner a withholding statement to that effect. A copy of this withholding statement is attached to petitioner's income tax return which is in evidence in this proceeding.In addition to being employed during the year 1946 by the Board of Education, City of Chicago, petitioner was employed by De Paul University, Chicago, Illinois, to teach in its night school. Petitioner received for his services in this capacity the1951 U.S. Tax Ct. LEXIS 153">157 sum of $ 2,101.50 in 1946. From this amount De Paul University withheld $ 282.65 as Federal income tax and furnished petitioner with a withholding statement showing that the amount of $ 282.65 had been withheld from his salary or wages as Federal income tax. Petitioner has attached a copy of this withholding statement to his income tax return which is in evidence.Petitioner taught accounting subjects in De Paul University night school. He was a licensed certified public accountant and was licensed to practice under the laws of the State of Illinois. In years prior to the taxable year 1946, petitioner during vacation periods had done some accounting work for clients for which he received certain fees in remuneration. In 1946 he received no fees from outside clients for certified public accounting work. During the year 1946, the petitioner made an analysis of the flexible budget of the Texas Tanning and Manufacturing Company. He received no fee for the work, nor did he expect to receive any, but rendered the service as a good will offering with the desire of making a permanent connection in the future.In his income tax return for 1946, petitioner reported as having been received1951 U.S. Tax Ct. LEXIS 153">158 from the Board of Education, City of Chicago, $ 3,773.47. This income was reported on the tax return as salary and wages. In addition, he reported income on line 5 of the tax return as "other income received $ 26.00." On Schedule C of his return he showed how this $ 26 was arrived at, as follows:(1) Nature of businessEducational(2) Business nameDe Paul Ev. School, including student fees1. Total receipts$ 2,105.5016 T.C. 1410">1412 From the $ 2,105.50 reported as having been received from De Paul University in Chicago, petitioner took the following deductions: depreciation, $ 300; net operating loss deduction, $ 1,779.50. These two deductions totaled $ 2,079.50 which, when subtracted from the $ 2,105.50 which petitioner received from De Paul University, left $ 26 which, as heretofore stated, petitioner reported as "other income" on page 1 of his return. The $ 1,779.50 item of deduction above mentioned was more particularly described by the petitioner in a separate schedule attached to his return as follows:Schedule CGas, Oil & car service$ 250.00Car Repairs142.50Car Maintenance97.50Garage Rent135.00Car Insurance95.00Rent (3/4 of household in lieu of office rent)675.00Telephone, stationery & Misc162.50Carfare & Misc19.50Light Expense55.001/2 Misc. Household147.501,779.501951 U.S. Tax Ct. LEXIS 153">159 Petitioner also, in his income tax return, took as deductions on page 3 of his return for "Contributions, Interest, Taxes and Miscellaneous" items which aggregated $ 872. The Commissioner in his determination of the deficiency disallowed the $ 872 deduction above described and allowed in lieu thereof the optional standard deduction of $ 500. In his deficiency notice the Commissioner disallowed the deductions, stating:Inasmuch as you were unable to substantiate your nonbusiness expense on Page 3, they have been disallowed and the standard deduction of $ 500.00 has been applied.The Commissioner also disallowed the so-called business deductions which petitioner took on his return aggregating $ 2,079.50. In disallowing these latter amounts as deductions, the Commissioner stated in his deficiency notice as follows:Since you did not substantiate that you are an independent contractor, auto expense and household expenses have been disallowed. * * Ultimate Facts.During the taxable year petitioner was an employee of the Board of Education of Chicago, Illinois, and of De Paul University. The petitioner was not engaged in a trade or business, and the deductions claimed by petitioner1951 U.S. Tax Ct. LEXIS 153">160 were not, therefore, ordinary and necessary expenses incurred in connection with petitioner's trade or business.16 T.C. 1410">1413 The traveling expenses of petitioner were not of the type allowed as a deduction to an employee under the provisions of the Internal Revenue Code.OPINION.Petitioner has not filed any brief in this proceeding but we have considered his case as carefully as if he had.Petitioner no longer presses his second assignment of error which in substance was that petitioner is entitled to an additional deduction of $ 304.50, 1 being the excess of nonbusiness deductions claimed over the optional standard deduction of $ 500 which the Commissioner has applied in his determination of petitioner's income tax liability. Petitioner at the hearing conceded that he would be unable to produce vouchers and receipts or other evidence in substantiation of the $ 872 deductions which he took on his return for contributions, interest, taxes, and miscellaneous items. Therefore, he accepted the optional standard deduction of $ 500 which the Commissioner allowed in his determination of the deficiency. That adjustment is no longer in controversy.1951 U.S. Tax Ct. LEXIS 153">161 Petitioner at the hearing continued to press his first assignment of error which was:a. The Commissioner erred in holding that petitioner was not an independent contractor, i. e., not in the practice of a profession, and in the disallowance as a deduction from gross income the amount of $ 2,221.50 claimed as a deduction by petitioner, in his return, as necessary expenses incurred in the production of a substantial portion of his income and in carrying on a trade or business, for the production or collection of income, and were deductible in accordance with Section 23 of the Internal Revenue Code.Petitioner claims certain expenditures amounting to $ 2,221.50 and paid during the taxable year qualify as deductions from gross income under the provisions of section 23 of the Internal Revenue Code. Petitioner has not referred to the subsections of section 23 upon which he bases his contentions for the deductions, but we will consider, nevertheless, each of the appropriate subsections of section 23, namely, 23 (a) (1) (A), 23 (a) (2) and 23 (l). Section 23 (a) (1) (A) reads as follows:SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions: 1951 U.S. Tax Ct. LEXIS 153">162 (a) Expenses. -- (1) Trade or business expenses. -- (A) In general. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for 16 T.C. 1410">1414 personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.Section 23 (a) (1) (A) of the Code distinguishes, perhaps arbitrarily, between expenditures incurred by a taxpayer in connection with his trade or business, and expenditures incurred by an employee in connection with his employment. Petitioner contends that he is engaged in a trade or business as a professional man and not as an employee. The term trade or business includes the practice of a profession, Treasury Regulations 111, section 29.22 (n)-1 providing "The practice of a profession, 1951 U.S. Tax Ct. LEXIS 153">163 not as an employee, is considered the conduct of a trade or business within the meaning of such section." Section 22 (n) (1) of the Code explains the term trade or business so as to exclude therefrom an employee:SEC. 22. GROSS INCOME. * * (n) Definition of "Adjusted Gross Income". -- As used in this chapter the term "adjusted gross income" means the gross income minus -- (1) Trade and business deductions. -- The deductions allowed by section 23 which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee; [Emphasis added.]The determination of whether a taxpayer has a relationship of an employee or an independent contractor is primarily a question of fact, see Raymond E. Kershner, 14 T.C. 168, and cases cited therein. As disclosed by our findings of fact, the only receipts reported by petitioner on his income tax return were the salaries received from educational institutions. Petitioner was employed during the taxable year as a school teacher. He taught in the public schools of Chicago and also taught night 1951 U.S. Tax Ct. LEXIS 153">164 school at De Paul University in Chicago. He was clearly an employee of these two agencies. We are unable to see where any of the $ 2,079.50 so-called business deductions which petitioner claimed on his return were properly attributable to any business carried on by petitioner within the meaning of the applicable provisions of the Code. For example, he claimed $ 675 as rent which he described in Schedule C of his return as "3/4 of household in lieu of office rent." Petitioner's testimony as to this claimed deduction was in substance that he rented an apartment in the City of Chicago during 1946 at $ 65 a month for himself and family. His testimony was to the effect that he did some of what might be termed his "homework" in his apartment and, therefore, he thought that three-fourths of his apartment rent should be attributed to rental for business purposes. 16 T.C. 1410">1415 We see no basis for such a deduction. As a school teacher he doubtless had to devote some time at home to grading papers, preparing to teach lessons and things of that sort and doubtless he used some room or space in his apartment as a study for such purpose, but we know of no law or regulation which would permit 1951 U.S. Tax Ct. LEXIS 153">165 him to allocate a part of his apartment rent for this purpose and then take it as a business expense. After considering the facts, we have determined that petitioner received income as an employee during the taxable year and that he was not engaged in a trade or business.Petitioner's deductions under the provisions of section 23 (a) (1) are limited, therefore, to the deductions permitted an employee. Under the provisions of section 23 (a) (1) (A) of the Code, as further explained by section 22 (n) (2), deductions from gross income of an employee are allowed only for "expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of his services as an employee." On his tax return petitioner claimed the following expenses, which might be classified as traveling expenses:Depreciation on automobile$ 300.00Gas, Oil & Car Service250.00Car Repairs142.50Car Maintenance97.50Garage Rent135.00Car Insurance95.00Carfare & Misc.19.50The evidence was to the effect that petitioner was the owner of an automobile and used it in transporting himself to and from the locations where he taught school. 1951 U.S. Tax Ct. LEXIS 153">166 Petitioner did not travel in the performance of his services as an employee as in Kenneth Waters, 12 T.C. 414. Cf. Irene L. Bell, 13 T.C. 344, and Raymond E. Kershner, supra. Such expenses as these incurred by the petitioner are commuting expenses, or personal expenses, and are denied as a deduction, Regulations 111, section 29.23 (a) -2 providing "Commuters' fares are not considered as business expenses and are not deductible." Moreover, petitioner's travel expenses fail to qualify as a deduction since another applicable provision of the Code is not satisfied. Petitioner's travel was performed entirely within the City of Chicago and it was not travel while away from home.We have explained why the petitioner is not entitled to these deductions under the provisions of section 23 (a) (1) (A) of the Code. Neither do we think the petitioner is entitled to a deduction for these expenditures under the provisions of section 23 (a) (2), which provide:16 T.C. 1410">1416 SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) Expenses. -- * * 1951 U.S. Tax Ct. LEXIS 153">167 (2) Non-trade or non-business expenses. -- In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.In discussing the possibility of deducting petitioner's expenses under section 23 (a) (1) (A), we noted that section 22 (n) of the Code excluded any deduction. Section 22 (n) limits an individual's deductions from gross income to those expenses which satisfy one of the six subsections of that Code provision. The limitations of section 22 (n) apply to any expenses claimed by petitioner as a deduction under section 23 (a) (2) of the Code, just as it applies to expenses claimed as a deduction under section 23 (a) (1) (A) of the Code. Ralph D. Hubbart, 4 T.C. 121. We have examined each expense itemized by the petitioner and we are unable to find a single expense which would satisfy section 22 (n) of the Code, and, therefore, none of these items are deductible from petitioner's gross income.Now as to petitioner's claim for a $ 300 depreciation deduction1951 U.S. Tax Ct. LEXIS 153">168 on his automobile, petitioner might contend that section 23 (l), I. R. C., is applicable. It provides for "A reasonable allowance for the exhaustion, wear and tear * * * (1) of property used in the trade or business." We have no evidence in this case which establishes that petitioner was using his automobile in any business carried on by him within the meaning of the statute. Besides, petitioner offered no evidence as to the cost of the automobile, its probable useful life, and other essential elements to establish a depreciation deduction. No depreciation deduction can therefore be allowed on petitioner's automobile.So far as we can see all the deductions which petitioner claimed in Schedule C attached to his return were personal expenses and not expenses attributable to any business which petitioner was carrying on during the year 1946. Petitioner makes some kind of claim that he was carrying on the business of a certified public accountant in 1946 and that the claimed deductions could be attributed, at least in part, to that business. We do not think the evidence supports this claim. It is true that petitioner was a licensed certified public accountant under the laws of 1951 U.S. Tax Ct. LEXIS 153">169 the State of Illinois and in some prior years had done some accounting work during vacation periods. However, in the year before us he received no accounting fees and did no work which would enable us to say he was engaged to any extent in the business of practicing as a certified public accountant. His only compensation in 1946 was from his services as school teacher in the Chicago Public Schools16 T.C. 1410">1417 and from teaching night school at De Paul University. The expenses for which he claims deduction cannot properly be allowed as deductions under the applicable sections of the Internal Revenue Code which we have considered in this opinion. The Commissioner is sustained in his disallowance of them.Decision will be entered for the respondent. Footnotes1. In his prayer for relief petitioner apparently conceded that of the $ 872 claimed as deductions on page three of his return $ 67.50 representing luxury and excise taxes was improperly claimed.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620832/	Lucy D. Gilpin v. Commissioner.Gilpin v. CommissionerDocket No. 8014.United States Tax Court1947 Tax Ct. Memo LEXIS 256; 6 T.C.M. 370; T.C.M. (RIA) 47085; April 8, 19471947 Tax Ct. Memo LEXIS 256">256 In 1941 petitioner deducted a loss resulting from a transaction entered into for profit in 1937 with one, Robert J. Boltz. Under the facts, held, the loss was reasonably certain and ascertainable in amount in 1940 and respondent's determination in disallowing the loss in 1941 is sustained, notwithstanding the recovery of a small part thereof in years subsequent to 1941. A. Edwin Gilfillan, Esq., 1500 Liberty Trust Bldg., Broad and Arch Sts., Philadelphia 7, Pa., for the petitioner. Karl W. Windhorst, Esq., for the respondent. ARNOLD Memorandum Findings of Fact and Opinion ARNOLD, Judge: Respondent determined an income tax deficiency for 1941 in the amount of $3,003.13. The sole issue is whether petitioner sustained a loss of $10,708.24 in 1941. The facts were partially stipulated. From the stipulated facts, the testimony and the documentary evidence we make the following Findings of Fact The petitioner is an individual. Her income tax return was filed with the collector of internal revenue in Philadelphia, Pennsylvania. On June 1, 1937, petitioner acquired from her husband, John C. Gilpin, in consideration of $14,346.19, an assignment of his rights1947 Tax Ct. Memo LEXIS 256">257 under a contract dated July 28, 1936 between him and one Robert J. Boltz. Under the contract Boltz was to act as attorney-in-fact for Gilpin as he had been doing for investors since 1933. Boltz was authorized to hold or sell, according to his judgment, the securities deposited by Gilpin, to invest the proceeds of sale, and to intermingle funds in one or more attorney bank accounts with other funds held under similar agreements, but with no other funds. Boltz could purchase securities for his principals in his own name as attorney and take delivery of one or more certificates or bonds, representing the aggregate of purchases for several principals under identical agreements, without separate certificates or bonds for each account. The purchase for a particular principal was to be immediately allocated on the books and records of Boltz to the principal's account as the sole and several owner thereof. The contract imposed no liability on Boltz for honest losses on investments. Boltz was required by the agreement to make quarterly statements to his principals showing all transactions during the preceding quarter, income actually received and securities on hand at the close of the quarter. 1947 Tax Ct. Memo LEXIS 256">258 Prior to June 30, 1937 the quarterly statements were received regularly by John C. Gilpin. Beginning June 30, 1937, and thereafter, the quarterly statements were regularly received by petitioner following notice from her husband to Boltz of the aforementioned assignment and transfer of the account to petitioner. The last quarterly statement received by petitioner was for the quarter ending March 31, 1940. The agreements between Boltz and his principals permitted the principal to withdraw on ten days' notice the whole or any portion of his fund including any increment thereto. On July 22, 1938, Boltz paid the petitioner at her request $1,500 out of purported earnings. Petitioner made no other request for the withdrawal of cash or securities and, except for said $1,500, received none. During the period January 1, to October 21, 1940 cash aggregating over $192,000 was withdrawn by 117 principals from their respective accounts with Boltz. During the same period cash and securities aggregating over $199,000 were deposited by 39 principals in their accounts. The largest sums withdrawn and deposited by a single principal during this period were $28,000 and $35,000, respectively. Boltz1947 Tax Ct. Memo LEXIS 256">259 occupied a large suite of offices in the heart of Philadelphia's financial district. He employed between four and six persons and his records indicated that he spent approximately $25,000 per year in maintaining the establishment. He had an excellent reputation in Philadelphia as a shrewd and successful investor and stock market operator. Petitioner was unaware that Boltz had been guilty of any irregularities in his operations until she was so notified on October 25, 1940. On that day, she and other principals were notified by letter that Boltz had disappeared and had not been heard from since October 22, 1940, and that preliminary survey of his accounts indicated that there had been irregularities in their operation. On October 28, 1940, involuntary proceedings in bankruptcy, No. 21524, in the United States District Court for the Eastern District of Pennsylvania, were begun against Robert J. Boltz, and a temporary receiver was appointed by the court. On November 4, 1940, the appointment of the receiver was made permanent and on the same date the receiver of the bankrupt estate was authorized to employ a certified public accountant. On November 7, 1940, a single indictment was1947 Tax Ct. Memo LEXIS 256">260 found in the Court of Quarter Sessions of Philadelphia County, Pennsylvania, charging that Boltz had, without registration and without license by the Pennsylvania Securities Commission, engaged in a transaction of $5,500,000 involving securities. By letter dated November 9, 1940, petitioner was notified by a protective committee of Boltz's principals with respect to the actions they had taken, was advised of the complexities that existed, was informed that the committee believed that the purposes for which it was appointed had been accomplished and that there was no further need for it to act as a committee, and was advised, to take such further steps as she deemed necessary best to protect her interests through her own counsel. On November 13, 1940, Boltz was adjudicated a bankrupt. On November 13, 1940, the receiver of the bankrupt estate filed a petition for leave to sell all the personal property belonging to Boltz. In an appraisal filed on December 4, 1940, the assets of the bankrupt estate as of November 30, 1940, were appraised at $19,381.99 The appraisal did not include Boltz's country estate in Bucks County, Pennsylvania, because of title being vested in him and his1947 Tax Ct. Memo LEXIS 256">261 wife. Settlement was later made with the wife which resulted in a sale of the real estate the latter part of 1941 whereby the bankrupt's estate realized $75,000. A $30,000 mortgage had to be paid off out of the amount realized. On December 4, 9, and 18, 1940, sales with respect to the he personal property were held. The sales were immediately confirmed by the referee. The total amount of the sales was $21,310.95, which sum was approximately $10,000 in excess of the total appraised value. On December 6, 1940, the accountant employed by the receiver filed his preliminary report with respect to the examination of Boltz's books and records. The report stated that Boltz should have had on hand on the date he absconded, i.e., October 22, 1940, moneys and securities belonging to his principals in the total amount of $2,253,426.09. Claims greatly in excess of $1,000,000 were filed by the principals in the bankruptcy proceedings, and thereafter were duly allowed by the referee. The claim of the petitioner was filed in the sum of $15,633.98 and was allowed in the sum of $10,708.24 as stipulated by agreement between her, and the trustee of the bankrupt estate, whose appointment is hereinafter1947 Tax Ct. Memo LEXIS 256">262 referred to. On December 30, 1940, upon evidence presented to the grand jury, sundry indictments were found against Boltz in the Court of Quarter Sessions of Philadelphia County, on charges of embezzlement of broker and agent, embezzlement by attorney-in-fact, and fraudulent conversion. A true bill was issued with respect to the amount of each principal, including the petitioner's account. On January 6, 1941 the receiver's bond in the bankrupt estate was increased from $20,000 to $35,000. On February 13, 1941 Boltz was arrested in Rochester, New York. On February 17, 1941 the receiver of the bankrupt estate was authorized to continue the employment of the certified public accountant for further examination of the bankrupt's books and records at an additional cost not to exceed $4,500. On February 18, 1941 Boltz went on trial in the Court of Quarter Sessions of Philadelphia County. When arraigned he pleaded guilty to all of the bills of indictment. Prior to imposing sentence, the court received testimony from numerous witnesses and Boltz testified in his own behalf. He testified that for some years prior to his absconding he had made no profits and few investments, merely1947 Tax Ct. Memo LEXIS 256">263 paying those principals who requested their money, and expenses and mythical profits out of funds collected from other principals. He admitted it was a matter of "robbing Peter to pay Paul." He further testified that he had kept his own books of original entry; that he had personally made all trades, operated the bank accounts, kept all books with respect to receipt and disbursement of all cash and securities, and opened his own mail. On his plea of guilty he was sentenced to serve not less than 20 nor more than 40 years in the Pennsylvania Eastern State Penitentiary. On March 25, 1941 the first meeting of the creditors of the bankruptcy proceedings was held with the referee. On the same date a trustee of the bankrupt estate was appointed. On July 30, 1942 the trustee of the bankrupt estate paid a preliminary dividend of 2 per centum. On December 17, 1943 the trustee paid a final dividend of 1.04165 per centum. The petitioner received on said dates the respective amounts of $214.16 and $111.54. Petitioner's income tax returns for 1940 and 1941 were prepared for her by her husband, an attorney of 40 years' experience. In fixing the year in which she sustained a loss in the Boltz1947 Tax Ct. Memo LEXIS 256">264 investment, he took into consideration the contract with Boltz, the statements of her account, Boltz's disappearance and the subsequent proceedings in bankruptcy and otherwise. Petitioner was advised by her husband that the loss was sustained in 1941, and a deduction of $10,708.24 was claimed in her 1941 income tax return. The books and records belonging to Boltz, except as to the receipt and disbursement of cash and securities, were completely false to petitioner were also completely false and fictitious except as to the payment of $1,500 to her on July 22, 1938. During 1940 and for years prior thereto the amounts lost, dissipated or repaid to principals exceeded the receipts from principals and from all other sources. It was a chronic practice during said years for Boltz to expend money as quickly as he received it. Boltz was completely insolvent at all times during said years. Except for the farm aforementioned, none of the other purported assets of the bankrupt's estate proved to be of value, and no hidden assets existed. The other purported asserits consisted of possible claims against banks and brokers with whom Boltz had dealt, possible claims against investors with Boltz1947 Tax Ct. Memo LEXIS 256">265 who had closed their accounts at a profit, and certificates of a non-existent investment company. Petitioner sustained a loss from her investment with Boltz in 1940. The omitted portions of the stipulated facts are incorporated herein by reference. Opinion The facts in this case establish that petitioner has sustained a loss and the amount thereof. The question we must decide is whether that loss was sustained in the taxable year 1941, as contended by petitioner, or in 1940 as contended by respondent. The latter relies upon our decision in . The Felton case involved another investor with Boltz who was victimized by the same acts of dishonesty that defrauded this petitioner. The position of the taxpayer in that case was that the identifiable events which fixed the year of loss occurred in 1940. The respondent denied the deduction. He determined that the loss was a loss due to embezzlement and was sustained prior to 1940 because of the general insolvency of Boltz. This court agreed with the petitioner and held that "under these facts, the identifiable event which determined petitioner's loss was the disappearance of Boltz in 1940." 1947 Tax Ct. Memo LEXIS 256">266 Petitioner accepts the Felton decision to the extent that the loss was not sustained in a year prior to 1940. She would distinguish this case upon the ground that no question was there presented as to the right of Felton to deduct the loss in 1941. She contends that a conclusion here similar to that reached in the Felton case is not justified where the events are differentiated as between 1940 and 1941 as has been done here. The events upon which petitioner relies to differentiate this case from the Felton case, relate almost entirely to possible assets investigated during the course of the bankruptcy proceedings in 1940. Petitioner hoped that some of these possible assets would prove to be valuable in 1941. As a matter of fact only one of them, the farm, ever proved to be of any value to the bankrupt's estate. The other possible assets from which she hoped additional sums might be realized by the bankrupt's estate consisted on December 31, 1940, of certificates in a non-existent investment company, possible claims against two banks and two brokerage firms that had dealt with Boltz, possible claims against principlas who had withdrawn sums from their accounts to their own enrichment, 1947 Tax Ct. Memo LEXIS 256">267 and possible hidden assets not yet uncovered. The facts weighing against any value remaining in petitioner's account with Boltz, possible claims two banks and two brokerage firms that had dealth with Boltz, possible claims against principals who had withdrawn sums from their accounts to their own enrichment, and possible hidden assets not yet uncovered. The facts weighing against any value remaining in petitioner's account with Boltz on December 31, 1940 are numerous and persuasive. The last quarterly statement that petitioner received from Boltz was for the quarter ending March 31, 1940. Failure to receive a statement for the second or third quarter, should have at least put her on notice that something was amiss. The letter received on October 25, 1940, notifying her of Boltz's disappearance and that a preliminary survey of his account dictated irregularities in his operations should have strengthened the conviction. The swift sequence of events following Boltz's disappearance on October 22, 1940, become less confusing when considered chronologically. Bankruptcy proceedings were started in October 1940; a permanent receiver appointed early in November; a single indictment found1947 Tax Ct. Memo LEXIS 256">268 against Boltz on November 7th; petitioner advised by the protective committee that it had ceased to function as a committee and that she should protect her own interests through counsel; Boltz adjudicated a bankrupt in November; the assets of the bankrupt's estate appraised at a little over $19,000; all the personal property of the bankrupt's estate sold in December 1940 for a little over $21,000; a preliminary report by the accountant showed that Boltz should have had on hand when he absconded money and securities of his principals in excess of $2,250,000; that claims filed in the bankruptcy proceedings, including petitioner's greatly exceeded $1,000,000; that the receiver's bond in 1940 was a mere $20,000; that Boltz was indicted late in December 1940 on various charges; and finally, the determination by this court in the Felton case that the identifiable event that fixed the year of the loss was Boltz's disappearance in 1940. Boltz's disappearance in October, 1940, with other successive events, justifies the conclusion that petitioner's investment became worthless prior to 1941. . Paraphrasing the language of the Supreme Court1947 Tax Ct. Memo LEXIS 256">269 in the cited case we too have serious losses over a period of years, receivership, receiver's reports, an excess of liabilities over assets, a termination of operations, and a bankruptcy sale. These factors, coupled with Boltz's disappearance and his indictments convince us that petitioner's investment became worthless prior to 1941. Petitioner has the burden of establishing that her claimed loss was in fact sustained in the taxable year, Boehm case, supra. to prevail she must show that the bankrupt's estate had assets of substantial value at January 1, 1941, and that she sustained her loss when such value disappeared during the taxable year. Petitioner has not attempted to place a value on the investment certificates or the possible lawsuits against the banks, brokers and others and we are unwilling to speculate as to the value thereof. The facts show that the bankrupt's estate had at December 31, 1940 assets listed on the receiver's appraisal (or cash from the sale thereof), plus a claim against Boltz's property rights in a farm in Bucks County, Pennsylvania. The value of the farm as of December 31, 1940, or at any other time, is undisclosed. We know that title to the farm was1947 Tax Ct. Memo LEXIS 256">270 vested in Boltz and his wife. We know that the farm was mortgaged. We know that late in 1941 the estate realized $45,000 on Boltz's interest therein, but we do not know that this value or any other value could be attributed to Boltz's interest in the farm on December 31, 1940. And even if we attributed a value of $45,000 thereto on December 31, 1940, which value was not established, petitioner's chances of recovering any substantial portion of her investment would be purely speculative in view of the total claims against and the costs of administering the bankrupt's estate. It is well recognized that a loss may be so reasonably certain in fact and ascertainable in amount that a deduction is under certain circumstances justified even before the loss is absolutely realized. . Recovery of a small part of a a loss in a subsequent year does not invalidate the deduction for the statute contemplates "that a loss may become complete enough for deduction without the taxpayer's establishing that there is no possibility of an eventual recoupment." ; ,1947 Tax Ct. Memo LEXIS 256">271 petition to review dismissed October 6, 1941, , where subsequent to the taxable year taxpayer recovered almost a fourth of the loss deducted; ; ; reversing ; , affirming B.T.A. Memorandum Opinion; , and The loss could not have been sustained in 1941 as claimed by petitioner as there was no change in the asset values and no distribution during that year. If the assets had any value at December 31, 1940 it remained until a year subsequent to 1941. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620833/	Moses Lake Homes, Inc., Cliff Mortensen, Liquidating Trustee, et al. 1 v. Commissioner. Moses Lake Homes, Inc. v. CommissionerDocket Nos. 90962-90964.United States Tax CourtT.C. Memo 1964-289; 1964 Tax Ct. Memo LEXIS 48; 23 T.C.M. 1756; T.C.M. (RIA) 64289; November 5, 19641964 Tax Ct. Memo LEXIS 48">48 Petitioners were engaged in the operation of Wherry Housing Projects located on Larson Air Force Base. On March 1, 1958, the United States Department of the Air Force commenced a condemnation suit, thereby acquiring title to the leasehold estates held by petitioners. Held: 1. Petitioners are entitled to deduct depreciation on leasehold improvements for a portion of the years in which condemnation occurred. Wyoming Builders, Inc. v. United States, 227 F. Supp. 534">227 F. Supp. 534 (D. Wyo. 1964), on appeal (C.A. 10, May 28, 1964), and Macabe Company, Inc., 42 T.C. 1105">42 T.C. 1105, followed. 2. Petitioners are entitled to deduct depreciation for the period March 1, 1958 through March 31, 1958, during which they remained in possession of the premises. John P. Lycette, Jr., 400 Hoge Bldg., Seattle, Wash., for the petitioners. Richard H. M. Hickok, for the respondent. WITHEYMemorandum Opinion WITHEY, Judge: The respondent determined deficiencies in petitioners' income tax for the years and in the amounts as follows: Fiscal yearPetitionerendedDeficiencyMoses Lake HomesApril 30, 1958$23,848.27April 30, 19593,876.95Larsonaire HomesJune 30, 19587,840.73Larson HeightsJune 30, 195823,644.16June 30, 1959226.81 The 1964 Tax Ct. Memo LEXIS 48">49 issues presented for our decision are (1) whether petitioners Moses Lake Homes, Larsonaire Homes, Inc., and Larson Heights, Inc., are entitled to deduct depreciation on leasehold improvements for a portion of their fiscal years ended April 30, 1958, June 30, 1958, and June 30, 1958, respectively, during which their leasehold estates were taken by the United States air Force through condemnation proceedings, and (2) in the event we hold that petitioners are entitled to claim depreciation deductions on their leasehold properties from the beginning of their fiscal years in question until March 1, 1958 (when title to the leaseholds vested in the Air Force), whether they are entitled to deduct depreciation on the improvements during the period March 1, 1958 through March 31, 1958, while they remained in possession thereof. All of the facts have been stipulated and are found accordingly. Petitioner Moses Lake Homes, Inc., sometimes hereinafter referred to as Moses, was incorporated under the laws of the State of Washington on May 1, 1950. It kept its books and prepared its income tax returns on an accrual method of accounting with its fiscal year ending April 30. Moses filed income tax returns 1964 Tax Ct. Memo LEXIS 48">50 for its fiscal years ended April 30, 1958 and 1959 with the director at Tacoma, Washington. Petitioner Larson Heights, Inc., sometimes hereinafter referred to as Larson, was incorporated under the laws of the State of Washington on July 24, 1954. It kept its books and prepared its income tax returns on an accrual method of accounting with its fiscal year ending June 30. Larson filed income tax returns for its fiscal years ended June 30, 1958 and 1959 with the director at Tacoma, Washington. Petitioner Larsonaire Homes, Inc., sometimes hereinafter referred to as Larsonaire, was incorporated under the laws of the State of Washington on July 31, 1955. It kept its books and prepared its income tax returns on an accrual method of accounting with its fiscal year ending June 30. Larsonaire filed an income tax return for its fiscal year ended June 30, 1958, with the director at Tacoma, Washington. At all times here material the outstanding capital stock of each of the petitioners was as follows: MosesLarsonLarsonaireCommon1,00033Preferred100100100During the years here pertinent the outstanding common stock of each of the petitioners was held as follows: MosesLarsonLarsonairesharessharessharesCliff Mortensen666 2/322Frank Henderson333 1/311All 1964 Tax Ct. Memo LEXIS 48">51 of petitioners' outstanding preferred stock was held by the Federal National Mortgage Association until February 25, 1959, at which time each of them redeemed its outstanding preferred. Petitioners were each engaged as sponsors of Wherry Housing Projects located on Larson Air Force Base in Grant County, Washington, under leases executed with the Secretary of the Air Force. Moses executed its lease with the Air Force on May 31, 1950; Larsonaire signed its lease on August 6, 1953; 2 and Larson executed its lease on August 2, 1954. Each of the Air Force leases provided generally that the lessee named therein was to erect, maintain, and operate a rental housing project for a period of 75 years. Each of the above-mentioned leases further provided as follows: 5. That the Lessee shall neither transfer nor assign this lease without the prior written approval of the Secretary of the Air Force. * * * 6. That the Lessee shall at all times exercise due diligence in the protection of the leased premises against damage or destruction 1964 Tax Ct. Memo LEXIS 48">52 by fire or other causes. * 8. That the Lessee shall pay to the proper authority, when and as the same become due and payable, all taxes, assessments, and similar charges which, at any time during the term of this lease, may be taxed, assessed or imposed upon the Government or upon the Lessee with respect to or upon the leased premises. * 11. 3 The buildings and improvements erected by the Lessee, constituting the aforesaid housing project, shall be and become, as completed, real estate and part of the leased lands, and property of the United States, leased to Lessee for the purpose of serving the governmental and public purpose of providing military housing in accordance with Title VIII of the National Housing Act * 13. That the Lessee shall, at any time after there is no Federal Housing Administration insured 1964 Tax Ct. Memo LEXIS 48">53 mortgage on the property and the leased premises are not under the control of the Commissioner, adhere to such standards of maintenance and repair of the housing project as shall be mutually agreed upon between the Lessee and the Commanding Officer; that the Lessee shall observe and perform in accordance with all the laws, ordinances, rules and regulations relating to health and sanitation for the time being applicable to the said leased premises; and will indemnify and save harmless the Government against all actions, suits, claims and damages by whomsoever brought or made by reason of the failure to keep said buildings and improvements in good order, condition and repair * * 15. The Government shall not be responsible for any damage to property or injury to person arising out of the use or occupancy of the leased premises by the Lessee or any sublessee, and the Lessee shall indemnify and save the Government harmless from any and all claims for any such damage or injuries * 20. That the Lessee, during the term of this lease, will, at its own cost and expense, insure and keep insured against fire the buildings that may hereafter be erected on the leased premises in an amount to 1964 Tax Ct. Memo LEXIS 48">54 be determined by the Government, payable both to the Lessee and any security holder, jointly as their respective interests may appear. * * * Pursuant to the above-described leases, Moses constructed 400 housing units, Larson constructed 200 housing units, and Larsonaire built 200 units. In order to finance the costs of construction petitioners each obtained mortgage loans insured by the Federal Housing Administration. After completion of the buildings and improvements, they operated the rental housing projects in the manner contemplated by the leases until April 1, 1958. On February 27, 1958, the owners of the outstanding common stock of petitioners adopted a resolution of dissolution and appointed Cliff Mortensen as liquidating trustee with authority to liquidate Moses, Larson, and Larsonaire. The trustee completed such liquidations as nontaxable transactions under the provisions of section 337 of the Internal Revenue Code of 1954. On March 1, 1958, the United States Department of the Air Force filed a declaration of taking and commenced a condemnation suit in the United States District Court for the Eastern District of Washington, Northern Division, thereby acquiring title to the 1964 Tax Ct. Memo LEXIS 48">55 leasehold estates held by Moses, Larson, and Larsonaire subject to outstanding mortgages in the amounts of $2,895,259.26, $1,568,809.02, and $1,701,947.59, respectively. On that date the Department of the Air Force deposited with the United States District Court $253,000 as estimated just compensation to petitioners for their interests in the real and personal properties taken. The deposit was allocated among the petitioners as follows: $126,500 to Moses; $61,200 to Larson; and $65,300 to Larsonaire. Immediately after the filing of the condemnation suit by the air Force on March 1, 1958, petitioners filed in the United States District Court for the Eastern District of Washington, Northern Division, a pleading in which they claimed that the total value of the properties taken was $8,000,000 and that they were entitled to just compensation to the extent of their interest therein, viz., the difference between $8,000,000 and the total outstanding mortgage indebtedness of $6,185,605. 41964 Tax Ct. Memo LEXIS 48">56 The Secretary of the Air Force, the Federal Housing Commissioner, and the Federal National Mortgage Association (designated "mortgagee") entered into agreements "as of March 1, 1958" and also on May 27, 1958, 5 whereby the Secretary of the Air Force purported to assume the outstanding mortgage indebtedness of each of the petitioners. Petitioners were not parties to such agreements. On April 1, 1958, petitioners surrendered possession of the leased properties to the Air Force. On August 27, 1962, Moses, Larson, and Larsonaire arrived at a settlement of their claims against the Department of the Air Force for the taking of their leasehold properties. The agreement provided a total lump sum settlement of $1,149,640 as just compensation for the taking of their interests in the condemned leasehold. The settlement agreement contained no allocation 1964 Tax Ct. Memo LEXIS 48">57 of the $1,149,640 amount as between the three petitioners. The agreement provided that the $253,000 amount previously deposited with the District Court by the Secretary of the Air Force "shall be credited against the amounts of just compensation fixed herein," leaving a balance of $896,640. On August 31, 1962, the District Court for the Eastern District of Washington, Northern Division, entered judgment awarding petitioners a total of $1,149,640 as just compensation, less the above-described $253,000 deposit. Moses, Larson, and Larsonaire each used the straight-line method of computing depreciation on the leasehold improvements erected by them. The useful lives utilized by each of the petitioners in computing depreciation on the principal assets on which depreciation was claimed by them during the taxable year here in issue were as follows: Moses LakeLarsonaireLarson Heights,Homes, Inc.Homes, Inc.Inc.400 units200 units200 unitsBuildings - Frame Construction, Rental use35 years35 years35 yearsEquipment, Fixed - Ranges and Refrigerators,Rental use10 years10 years10 yearsEquipment, Portable - Shades, Venetian Blinds,Maintenance Equipment, etc.5-10 years10 years10 yearsSewer and Water System50 years50 yearsRoadways and Land Improvements - Black-topstreets, concrete sidewalks and curbs andlandscaping15 years15 years15 yearsOffice Equipment10 years1964 Tax Ct. Memo LEXIS 48">58 The cost of the properties condemned by the Department of the Air Force, the depreciation previously allowable thereon, and the adjusted basis thereof at the beginning of each of the petitioners' fiscal years ended April 30, 1958, and June 30, 1958, were as follows: PriorAdjusted basis at theDateallowablebeginning of the fis-Petitioner1957Costdepreciationcal years in issueMosesMay 1$3,171,872.45$636,796.14$2,535,076.31LarsonJuly 11,627,074.0399,506.281,527,567.75LarsonaireJuly 11,773,648.51155,291.121,618,357.39On their income tax returns for each of their fiscal years ended April 30, 1958, and June 30, 1958, Moses, Larson, and Larsonaire claimed deductions for depreciation on the properties condemned by the Air Force on March 1, 1958, in the amounts of $98,183.15, $39,802.50, and $42,382.62, respectively. On their income tax returns for their fiscal years ended April 30, 1959, and June 30, 1959, Moses and Larson claimed net operating loss carryover deductions in the amounts of $40,661.45 and $756.04, respectively. In his notices of deficiency, the respondent disallowed in full the above-stated depreciation deductions claimed by petitioners for their fiscal years ended April 30, 1958, 1964 Tax Ct. Memo LEXIS 48">59 and June 30, 1958. The respondent also disallowed the net operating loss deductions claimed by Moses and Larson, respectively, on their returns for their fiscal years ended April 30, 1959, and June 30, 1959, respectively. The disallowance of the net operating loss deductions claimed by Moses and Larson for their fiscal years ended April 30, 1959, and June 30, 1959, respectively, was based upon the respondent's determination that petitioners are not entitled to claim depreciation deductions for their fiscal years ended April 30, 1958, and June 30, 1958. The respondent has not disallowed the depreciation deductions claimed by petitioners for any year prior to their fiscal years ended April 30, 1958, and June 30, 1958. It is unquestioned that, as lessees under three 75-year leases with the Air Force, petitioners had acquired a sufficient economic interest in the leasehold improvements which they erected to be entitled to take depreciation deductions thereon 6 until March 1, 1958. Although Moses retained title to its leasehold and remained in possession throughout at least 10 months of its fiscal year ended April 1964 Tax Ct. Memo LEXIS 48">60 30, 1958, and Larson and Larsonaire each held title to their leasehold estates and retained possession for at least 8 months of their fiscal years ended June 30, 1958, it is the respondent's position that they are not entitled to deduct any depreciation whatever for those years on the depreciable improvements which they constructed. The respondent contends that this is so because by virtue of the condemnation suit commenced by the Air Force on March 1, 1958, petitioners realized "salvage value" at least to the extent of the total amount of the outstanding mortgages ($6,185,605), which amount exceeds their total adjusted basis in the leasehold improvements at the beginning of the years in issue. 71964 Tax Ct. Memo LEXIS 48">61 Upon commencement of the condemnation suit and the filing of a declaration of taking by the Department of the Air Force on March 1, 1958, title to the leasehold vested in the United States, 8 subject, however, to the outstanding mortgages listed above (note 7, supra). It is well established that for tax purposes such a taking of property for public use through condemnation constitutes an involuntary sale of the property at the time title thereto vests in the public authority. Commissioner v. Kieselbach, 127 F.2d 359, affd. on other grounds, 317 U.S. 399">317 U.S. 399; 44 West 3rd Street Corporation, 39 T.C. 809">39 T.C. 809, affd, 326 F.2d 600; Wood Harmon Corporation v. United States, 206 F. Supp. 773">206 F. Supp. 773, affd. on other grounds, 311 F.2d 918; cf. Hawaiian Gas Products v. Commissioner, 126 F.2d 4, affirming 43 B.T.A. 655">43 B.T.A. 655, certiorari denied 317 U.S. 653">317 U.S. 653. It is not clear from the record whether petitioners realized during the years in issue the amount ($253,000) deposited with the District Court by the Department of the Air Force on March 1, 1958. To be entitled thereto, it was incumbent upon Moses, Larson, and Larsonaire to make application to the District Court and to establish that 1964 Tax Ct. Memo LEXIS 48">62 title to the property was not in question. 9 Otherwise they had no right to receive any part of the deposit. Nitterhouse v. United States, 207 F.2d 618. It is not shown whether they presented such application and proof to the District Court during the years here in question. It is nevertheless clear that as a result of the involuntary disposition of their leasehold interests the petitioners on March 1, 1958, realized the amounts of the total mortgages outstanding, subject to which their leasehold estates on that date were transferred to the United States Air Force. Crane v. Commissioner, 331 U.S. 1">331 U.S. 1; Parker v. Delaney, 186 F.2d 455; Wala Garage v. United States, 163 F. Supp. 379">163 F. Supp. 379. The respondent's contention is that the salvage value of depreciable property is the amount realized from the unexpected disposition thereof at any time, regardless of whether the asset has been used up by petitioners in their trade or business, and regardless of whether or not such asset, at the end of its useful life, could have been sold or demolished by them. He does not claim that petitioners deducted excessive 1964 Tax Ct. Memo LEXIS 48">63 depreciation during years prior to the years in question. The rationale underlying the respondent's position is that inasmuch as petitioners realized from the sale of their leases an amount gerater than their adjusted bases therein at the beginning of the years in issue, they suffered no actual economic loss during those years, but in fact recovered their investments in the improvements through receipt of the sales proceeds. Petitioners, on the other hand, claim that the salvage value of depreciable property is wholly unrelated to the amount realized by an unanticipated disposition thereof prior to the end of its useful life, that the property in question could not realistically be assigned any salvage value, and that under the provisions of section 167(a) of the 1954 Code 101964 Tax Ct. Memo LEXIS 48">64 they are entitled to deduct depreciation during the years in issue, at least until title to the leasehold passed to the Air Force. 11A situation almost identical to the facts here presented was involved in a recent decision by the United States District Court for the District of Wyoming in Wyoming Builders, Inc. v. United States, 227 F. Supp. 534">227 F. Supp. 534 (D. Wyo. 1964), on appeal (C.A. 10, May 28, 1964). The taxpayer there, as here, constructed and operated a Wherry Housing Project on a United States Air Force base. On or about December 28, 1956, the Air Force notified the taxpayer of its intention to acquire all such Wherry projects from their private operators. By an agreement executed August 28, 1958, the taxpayer sold its right, title, and interest in the leasehold estates to the Air Force for $4,436,706.76. At the beginning of the taxable year there in issue the taxpayer's adjusted basis in the leasehold property was $3,158,206.56. The Commissioner disallowed all the depreciation claimed during the year of sale on the ground that, inasmuch as the amount realized from the disposition of the lease 1964 Tax Ct. Memo LEXIS 48">65 exceeded the taxpayer's adjusted basis in the property at the beginning of the year, it had actually recovered its investment in the property by virtue of the sale thereof during that year. In rejecting the Commissioner's contention, the District Court stated: The Government's theory that no depreciation occurred in the year of the sale is patently not based on Section 167 of the Code which does not qualify or eradicate the allowable depreciation according to the effects or results of the sale of the assets of the taxpayer. Depreciation occurs by use; the use of the property by the taxpayer until September 1, 1958, when the sale took place, resulted in a continued depreciation of the property until September 1, 1958. The expense of using the property was properly allocated by the taxpayer to the period of time which was benefited by that asset, that is, from the beginning of the fiscal year in issue until the date of the sale. * * With respect to the Commissioner's argument that the amount realized ($4,436,706.76) from the sale of the property to the Air Force constituted salvage value, the District Court, after referring to the regulations governing salvage value, 12 commented as 1964 Tax Ct. Memo LEXIS 48">66 follows: The argument that the salvage value is automatically transformed into the actual known sale price is an unreasonable dilation of the concept of the "estimate" required by the regulation. This court will not emasculate the regulation by changing the word "realizable" to "realized." Sec. 1.167(a)-1(e) of the Treasury Regulations does not require that salvage always have a value and that it cannot be a zero value. The regulation merely requires 1964 Tax Ct. Memo LEXIS 48">67 that salvage value be "taken into account" in determining the depreciation deduction. Taking into account salvage value, therefore, as defined in the regulations, it is clear that the facts of this case absolutely preclude the taxpayer from enjoying or anticipating any salvage value. It had to be zero at all times. Under the terms of the lease the property belonged to the government; it could not, therefore, be sold or retired from service, or disposed of by the taxpayer upon his own volition. The taxpayer could not determine that the property was no longer useful to the business of the corporation. Not one of the characteristics of salvage value as defined in Section 1.167(a)-1(c) is present * * * Taxpayer could never expect to receive any amount for the assets by retiring them, discontinuing them, or disposing of them. * * * We have recently reached a conclusion similar to that of the District Court in 227 F. Supp. 534">Wyoming Builders, Inc. v. United States, supra, in our decision in Macabe Company, Inc., 42 T.C. 1105">42 T.C. 1105 (Sept. 29, 1964), a case involving an analogous situation. The taxpayer owned an office building which it sold near the close of the taxable year there in question, after holding 1964 Tax Ct. Memo LEXIS 48">68 it for 9 years. It had employed the straight-line method of computing its depreciation allowance on the building, using an estimated useful life of 33 1/3 years and an estimated salvage value of zero. It realized $3,900,000 from the sale of the building on July 25, 1958, which amount exceeded its adjusted basis therein at the beginning of the year of sale. The Commissioner disallowed the depreciation deduction claimed by the taxpayer for the year of sale. We there found that the taxpayer's estimate of a zero salvage value for the building was reasonable and held that under the circumstances presented the amount realized from the sale of the building did not constitute salvage value and that the taxpayer accordingly was entitled to a depreciation deduction in the year of sale. In so holding we pointed out in our opinion that: (1) Depreciation results from the retention and use of an asset rather than from a fluctuation in its market value; (2) The salvage value of an asset is an estimate made by the taxpayer at the time of acquisition and commencement of use, rather than a subsequent adjustment based upon unanticipated sales or market conditions; (3) The salvage value of depreciable 1964 Tax Ct. Memo LEXIS 48">69 property cannot properly be equated with the sales price realized from an unexpected disposition thereof prior to the end of its useful life; and (4) The respondent is prevented by his regulations from adjusting the taxpayer's estimate of salvage value without making a concomitant redetermination of his estimate of the asset's useful life. 13 As we have suggested in our opinion in 42 T.C. 1105">Macabe Company, Inc., supra, and as the District Court indicated in 227 F. Supp. 534">Wyoming Builders, Inc. v. United States, supra, the most striking difficulty presented by the respondent's position in denying all depreciation claimed for the year of sale is that it is fundamentally inconsistent with the statutory allowance of a deduction for depreciation. Section 167(a) and its predecessors in the revenue acts extending back unbrokenly to the Revenue Act of 1913 represent the statutory embodiment of a universally accepted cost accounting principle, viz., that the business use of property in which a taxpayer has made a capital investment necessarily involves a continuous consumption of capital which should be given accounting and tax recognition as a periodic charge 1964 Tax Ct. Memo LEXIS 48">70 against business income.141964 Tax Ct. Memo LEXIS 48">71 That the depreciation deduction was intended by Congress to constitute an offset against ordinary income is obvious from the structure of the statute itself which specifically provides for the allowance of a deduction for depreciation from gross income: SEC. 63. TAXABLE INCOME DEFINED. (a) General Rule. - Except as provided in subsection (b), for purposes of this subtitle the term "taxable income" means gross income, minus the deductions allowed by this chapter * * * SEC. 167. DEPRECIATION. (a) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) - The essential nature and purpose of the depreciation deduction was described long ago by the Supreme Court in United States v. Ludey, 274 U.S. 295">274 U.S. 295, in which the Court stated: The depreciation charges permitted as a deduction from gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. The theory underlying this allowance for depreciation is that by using up the plant a gradual sale is made of it. The depreciation charged is the measure of the cost of the part which has been sold. * * * It is therefore apparent that the purpose of Congress in providing an allowance for depreciation was to permit taxpayers to recover tax free their investment (cost less estimated salvage value) in business assets as an offset against ordinary income. 1964 Tax Ct. Memo LEXIS 48">72 The respondent's contention here, however, as in 227 F. Supp. 534">Wyoming Builders, Inc. v. United States, supra, and 42 T.C. 1105">Macabe Company, Inc., supra, is bottomed on an entirely different premise, i.e., that the taxpayer may (and must), as a substitute for the depreciation deduction, recover his investment in business property through the receipt of sales proceeds resulting from the unanticipated disposition of the asset prior to the expiration of its useful life. 151964 Tax Ct. Memo LEXIS 48">73 We noted this aspect of the Commissioner's position in our opinion in 42 T.C. 1105">Macabe Company, Inc., supra, in which we stated as follows: We find merit in petitioner's argument that the granting of a reasonable allowance for depreciation is a matter separate and distinct from the computation of gain upon the sale of property formerly held in the taxpayer's trade or business or for the production of income. The concepts of depreciation through the process of exhaustion, on the one hand, and of appreciation or depreciation because of market conditions, on the other hand, are mutually exclusive. Respondent, however, has sought to equate the two. * * * Clearly when a taxpayer sells an asset in a taxable year in which he has also used it in his business, he has created two separate and distinct events that give rise to different results for tax purposes: (1) The gain or loss realized from the sale normally is accounted for under sections 1002 and 1231 of the Code; and (2) Under section 167(a), the taxpayer is entitled to a deduction from gross income for depreciation. These separate provisions of the Code and their predecessors in prior revenue acts historically have always been regarded by Congress as mutually exclusive in purpose and effect. The receipt of proceeds resulting from the sale of an asset has never (until the Revenue Acts of 1962 and 1964) had anything whatever to do with the depreciation deduction. 16 The depreciation deduction has never been considered to be a charge against gain realized from the disposition of a capital asset, but rather against ordinary income and, contrariwise, the receipt of capital gain has never been regarded as a substitute for 1964 Tax Ct. Memo LEXIS 48">74 the depreciation deduction. During the early years of the revenue acts, which provided an allowance for depreciation (Revenue Acts of 1913, 1916, and 1918), there were no provisions granting special tax treatment for capital gains. With the advent of the capital gain provisions 17 Congress has added no amendments 181964 Tax Ct. Memo LEXIS 48">75 which would indicate any connection between such provisions and the section allowing a deduction for depreciation. 19As an offset against ordinary income which is reportable on an annual basis, 20 and as an allowance which by its very nature is dependent upon the passage of time, it is imperative that depreciation be related to the proper taxable period in order accurately to reflect the true cost to the taxpayer of his use of the asset and thereby to disclose correctly his true net income for that period. Massey Motors v. United States, 364 U.S. 92">364 U.S. 92. 211964 Tax Ct. Memo LEXIS 48">76 Accordingly, it is a well-established rule of tax law that a taxpayer must continue to depreciate an asset up until the time of its sale. Virginian Hotel Co. v. Helvering, 319 U.S. 523">319 U.S. 523; Herbert Simons et al., 19 B.T.A. 711">19 B.T.A. 711; Capital City Investment Company, 4 B.T.A. 933">4 B.T.A. 933; Even Realty Co., 1 B.T.A. 355">1 B.T.A. 355. The Commissioner has incorporated this rule in his regulations which provide: (b) The period for depreciation of an asset shall begin when the asset is placed in service and shall end when the asset is retired from service. A proportionate part of one year's depreciation is allowable for that part of the first and last year during which the asset was in service. * * [Sec. 1.167(a)-10(b), Income Tax Regs.] Consequently, by excluding the last year of the petitioners' use from their "period for depreciation," the respondent has contravened his own regulations. To eliminate completely the taxpayer's depreciation deduction for that part of the 1964 Tax Ct. Memo LEXIS 48">77 last taxable year in which the asset was used by the taxpayer in his business, as the respondent has done here, has no justification in law or logic or accounting practice. Furthermore, inasmuch as the respondent has not redetermined the useful life of any asset as to which depreciation was deducted by petitioners, he has disregarded another provision of his regulations, as was pointed out by this Court in 42 T.C. 1105">Macabe Company, Inc., supra, and by the District Court in 227 F. Supp. 534">Wyoming Builders, Inc. v. United States, supra.Sec. 1.167(a)-1(c), Income Tax Regs., note 12, supra. In addition to our opinion that the respondent's position here is essentially erroneous as a matter of law, it seems clear that, under the lease arrangements here involved, the petitioners of necessity could not have expected to realize any salvage value whatsoever upon the expiration of the useful lives of the improvements in question. As was the case in 227 F. Supp. 534">Wyoming Builders, Inc. v. United States, supra, under the leases in question title to the improvements vested in the Air Force at the time of construction. Petitioners would have been unable to sell or demolish the improvements they erected on the leasehold premises 1964 Tax Ct. Memo LEXIS 48">78 without the express permission of the Air Force. See Rosenblum v. Terry Carpenter, Inc., 62 Wyo. 417">62 Wyo. 417, 174 P.2d 142; Delano v. Tennent, 138 Wash. 39, 244 P. 273">244 P. 273. In the event that petitioners had at any time torn down any of the improvements, the remaining scrap and salvage material would have belonged to the Air Force, not to them. If, at the termination of the 75-year leases in question, any of the improvements built by petitioners remained on the property, their leasehold interests therein would have reverted to the Air Force without the retention of any right to reimbursement. See Title & Trust Co. v. Durkheimer Inv. Co., 115 Or. 427, 63 P.2d 909. Under the foregoing circumstances the anticipated salvage value of the leasehold improvements in question, as in 227 F. Supp. 534">Wyoming Builders, Inc. v. United States, supra, necessarily had to be zero at all times. Inasmuch as Moses, Larson, and Larsonaire did not hold title to the improvements constructed by them and realistically could have assigned them only a zero salvage value, the situation presented here is factually distinguishable from United States v. Motorlease Corporation, 334 F.2d 617, reversing 215 F. Supp. 356">215 F. Supp. 356, and Fribourg Navigation Co., Inc. v. Commissioner, 335 F.2d 15, 1964 Tax Ct. Memo LEXIS 48">79 affirming a Memorandum Opinion of this Court, as well as Cohn v. United States, 259 F.2d 371, upon which the respondent relies. In each of those cases the taxpayer had full right of ownership over the assets in question and was free to dispose of them at any time. In view of the factual situation here presented which so clearly discloses that petitioners at the time of construction could not properly have assigned more than a zero salvage value to the depreciable assets involved, we are unable to understand how the respondent can hopefully contend that they actually realized more than $6,000,000 as salvage value. The strange posture in which the respondent, by thus contending, has placed himself brings sharply into focus the false foundation upon which his position rests. Under the authority of 227 F. Supp. 534">Wyoming Builders, Inc. v. United States, supra, and 42 T.C. 1105">Macabe Company, Inc., supra, we decide this issue for petitioners. The respondent contends in the alternative that in the event we decide that petitioners are entitled to deduct some depreciation for the years in issue, they nevertheless are not entitled to claim any such deduction for the period March 1, 1958 through March 31, 1958, during 1964 Tax Ct. Memo LEXIS 48">80 which they remained in possession of the premises. Although on March 1, 1958, title to the leasehold estates vested in the Department of the Air Force, it is clear that ownership is not a prerequisite to the right to claim a depreciation deduction. Helvering v. Lazarus & Co., 308 U.S. 252">308 U.S. 252. To be entitled to such a deduction, it is only necessary that the taxpayer show that he is in a position to suffer an economic loss in his investment as a result of the diminution in value of the property resulting from use and the passage of time. Weiss v. Wiener, 279 U.S. 333">279 U.S. 333; Duffy v. Central R.R., 268 U.S. 55">268 U.S. 55. As mentioned above, petitioners had actually relinquished title to the depreciable property in question at the time the improvements were added to the premises, long prior to the commencement of the condemnation suit by the Air Force. Yet it is unquestioned that they had acquired a depreciable economic interest in the property at the time of construction, and that they retained such an interest at least until March 1, 1958. After relinquishing title to the leasehold to the Air Force on that date, they remained in possession for one month, operating the housing projects, collecting and 1964 Tax Ct. Memo LEXIS 48">81 retaining rentals, and maintaining the property in the manner contemplated by the leases. Under such circumstances we are of the opinion that Moses, Larson, and Larsonaire retained an economic interest in the depreciable improvements during the period March 1, 1958 to March 31, 1958, and that they are entitled to deduct depreciation on the improvements for that period. Edith Henry Barbour, 44 B.T.A. 1117">44 B.T.A. 1117, reversed on other grounds 136 F.2d 486, on which respondent relies is clearly distinguishable on its facts. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: Larsonaire Homes, Inc., Cliff Mortensen, Liquidating Trustee, Docket No. 90963, and Larson Heights, Inc., Cliff Mortensen, Liquidating Trustee, Docket No. 90964.↩2. The stipulated date of execution of the Larsonaire lease on August 6, 1953, nearly 2 years prior to its incorporation on July 31, 1955, is not explained by the parties.↩3. Paragraph 11 of the lease executed by Moses differs somewhat from the provision contained in paragraph 11 of the leases executed by Larson and Larsonaire. Paragraph 11 of the Moses lease states: 11. Upon the expiration of this lease, or earlier termination, all improvements made upon the leased premises shall become the property of the Government without compensation.↩4. Although the outstanding mortgages of Moses, Larson, and Larsonaire as of March 1, 1958, which were stipulated to be $2,895.26, $1,568,809.02, and $1,701,947.59, respectively, total $6,166,015.87, the parties have stipulated that the total outstanding mortgage indebtedness of the petitioners on that date was $6,185,605. The discrepancy of $19,589.13 is not explained by the record.5. The agreement executed May 27, 1958, with respect to the mortgage indebtedness of Moses Lake Homes, Inc., referred to its mortgagee as the Institutional Securities Corporation.↩6. Duffy v. Central R.R., 268 U.S. 55">268 U.S. 55; Gladding Dry Goods Co., 2 B.T.A. 336">2 B.T.A. 336↩.7. The amounts which the respondent contends were realized by each of the petitioners during the years in issue in excess of its adjusted basis in the condemned property at the beginning of the year are as follows: ↩Unpaid balances of mortgages outstanding against lease-MosesLarsonLarsonairehold acquired by Air Force on March 1, 1958$2,895,259.26$1,568,809.02$1,701,947.59Deposited with District Court by Air Force as estimatedcompensation on March 1, 1958126,500.0061,200.0065,300.00Total amount realized by petitioners during fiscal yearsin issue$3,021,759.26$1,630,009.02$1,767,247.59Less adjusted basis of property at beginning of fiscal yearsin issue2,535,076.311,527,567.751,618,357.39Amount realized by petitioners in excess of adjusted basisin property at beginning of fiscal years in issue$ 486,682.95$ 102,441.27$ 148,890.208. 46 Stat. 1421.↩9. 69 Stat. 652; 70 Stat. 1111; United States v. 3.08 Acres of Land, Etc., 46 F. Supp. 64">46 F. Supp. 64↩.10. SEC. 167. DEPRECIATION. (a) General Rule. - There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) - (1) of property used in the trade or business, or (2) of property held for the production of income. 11. As is hereinafter more fully explained, petitioners also contend that they are entitled to deduct depreciation until they surrendered possession of the premises to the Air Force on April 1, 1958.↩12. INCOME TAX REGULATIONS. § 1.167(a)-1. Depreciation in general. * (c) Salvage. (1) Salvage value is the amount (determined at the time of acquisition) which is estimated will be realizable upon sale or other disposition of an asset when it is no longer useful in the taxpayer's trade or business or in the production of his income and is to be retired from service by the taxpayer. Salvage value shall not be changed at any time after the determination made at the time of acquisition merely because of changes in price levels. However, if there is a redetermination of useful life under the rules of paragraph (b) of this section, salvage value may be redetermined based upon facts known at the time of such redetermination of useful life. * * ↩13. Sec. 1.167(a)-1(c), Income Tax Regs.↩, note 12, supra.14. A subcommittee of the House Committee on Ways and Means described the depreciation deduction as follows: In the first place, it must be remembered that these amounts deducted from income do not represent cash outgo like wages, repairs, and similar expenses, but are annual reserves generally theoretically set aside to replace plant and property investments. * * [House Ways and Means Committee, Preliminary Report of Subcommittee, Prevention of Tax Avoidance, Part 1(2) Depreciation and Depletion, 73d Cong., 2d Sess., p. 4 (1933).]15. Presumably, the gain realized by petitioners from the sale of their leasehold interests to the Air Force, had it been recognized, would have constituted capital gain. Golonsky v. Commissioner, 200 F.2d 72, affirming 16 T.C. 1450">16 T.C. 1450; Louis W. Ray, 18 T.C. 438">18 T.C. 438↩.16. Appreciation in market value has been held not to affect the depreciation deduction. United States v. Ludey, 274 U.S. 295">274 U.S. 295. In Max Eichenberg, 16 B.T.A. 1368">16 B.T.A. 1368, we held: for the purpose of computing profit from the sale of depreciable property sustained depreciation may not be offset by appreciation in the market value of the property involved. * * * In Even Realty Co., 1 B.T.A. 355">1 B.T.A. 355↩, we stated, at page 361: There is no reason why wear and tear, purely intrinsic matters, need be tied up to appreciation resulting from extrinsic causes. The two can go on simultaneously and no provision of law requires the one to be offset against the other. * * * 17. Revenue Act of 1921. ↩18. Prior to the enactment of section 1245 and 1250 of the 1954 Code, which are not applicable to the years before us. 19. In 42 T.C. 1105">Macabe Company, Inc., supra, we stated: We do not believe that the mere enactment of the predecessor of section 1231↩, which simply provided that gains on the sale or exchange of depreciable property held for more than six months would be considered as capital gains, also changed in any way the previously existing statutory scheme providing for (1) the depreciation of an asset up to the time of sale and (2) the taxation of any gain or loss realized upon the sale of such an asset, as a result of market conditions, pursuant to the applicable provisions relating to gain or loss.20. Burnet v. Sanford & Brooks Co. 282 U.S. 359">282 U.S. 359↩. 21. In 364 U.S. 92">Massey Motors v. United States, supra, the Supreme Court stated: Finally, it is the primary purpose of depreciation accounting to further the integrity of periodic income statements by making a meaningful allocation of the cost entailed in the use (excluding maintenance expense) of the asset to the periods to which it contributes. * * *	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620835/	DENNIS L. ANKENY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAnkeny v. CommissionerDocket No. 32141-85.United States Tax CourtT.C. Memo 1987-247; 1987 Tax Ct. Memo LEXIS 244; 53 T.C.M. 827; T.C.M. (RIA) 87247; May 11, 1987. 1987 Tax Ct. Memo LEXIS 244">244 Held: Petitioner made a donation to a church of part of the proceeds of the sale of his property, not a donation of a fractional equity interest in the property as such, and is entitled to a deduction only for the cash contribution. Dennis L. Ankeny, pro se. Michael R. McMahon, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined a deficiency in the amount of $3,933 in petitioner's Federal income tax for 1981. The issue for decision is whether petitioner is entitled to a charitable contribution deduction for an 8-percent interest in real property as such or for an 8-percent interest in the proceeds of the sale of the property. FINDINGS OF FACT At the time the petition was filed, petitioner was a resident of the State of Washington. On January 23, 1981, petitioner received an offer to purchase for $225,000 a duplex house that he owned and rented in Seattle, Washington. On February 6, 1981, petitioner made a counteroffer to sell the house for a price of $235,000, and his offer was accepted on February 6 or 7, 1981. On February 6, 1981, Pacific West Escrow Co., Inc., prepared an1987 Tax Ct. Memo LEXIS 244">245 inartfully drafted 1 quitclaim deed for petitioner whereby petitioner intended to convey 8-percent of the proceeds of the sale of the house to Dunlap Baptist Church (hereinafter the Church). The quitclaim deed was acknowledged by petitioner on February 23, 1981. Petitioner's objective was to make available, through the Church, approximately $19,000 to the Royal Brougham Memorial Fund for the construction of a sports arena at Lake Retreat Bible Camp. There is no evidence the deed was ever recorded, and the Church did not share in the rent for the period between the execution of the quitclaim deed and the closing of the sale. The sale of the property closed on March 25, 1981. On or about the1987 Tax Ct. Memo LEXIS 244">246 same day, Pacific West Escrow Co., Inc., delivered to the Church a check in the amount of $18,800 representing 8 percent of the proceeds from the sale of the property. The Church did not sign the deed conveying the property to the purchaser or any of the other papers closing the transaction. On his income tax return for 1981, petitioner claimed a charitable contribution deduction of $18,800 for the "Fair market value of real estate donated to Dunlap Baptist Church," reduced the sale price of the property by $18,800, and made correlative adjustments to basis and costs of sale. Respondent determined the deficiency by treating the transaction as a sale by petitioner of his entire interest in the property and a cash donation of $18,800 to the Church. OPINION The issue as to whether a taxpayer has made a charitable contribution of an interest in appreciated property or of the proceeds of the sale of such property has been frequently litigated in a variety of factual settings. In , the controlling shareholder of a corporation donated notes to three charitable foundations, and in the same month the corporation redeemed1987 Tax Ct. Memo LEXIS 244">247 the notes. This Court rejected the Commissioner's contention that the shareholder realized income as a result of the donation and redemption of the notes, stating (at 913): A gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title thereto before the property gives rise to income by way of a sale. * * * In , the taxpayer made a gift to a charity of a $10,000 equity in a stand of timber and within a few weeks sold the entire stand on behalf of the charity and himself, specifying that the $10,000 was payable directly to the charity. The Court held that the taxpayer did not realize income from the sale of the $10,000 equity because the gift preceded the sale, stating (at 789): The test seems to be simple: Did the donor part with title to the property producing the income? If he did, then the sale by the donee does not result in taxation to the donor. But if the donor keeps title to the property and gives away only current income, such income is taxed to him as if actually received to prevent planned income splitting. * * * [The taxpayer] 1987 Tax Ct. Memo LEXIS 244">248 parted with an equity of $10,000 in his timber, and the subsequent sale thereof does not cause realization of income by him. Where the facts and circumstances show that the donor retained control over the asset after a purported transfer, however, the courts have held that the transfer was an anticipatory assignment of income which did not relieve the donor of taxation on the sales proceeds. See, e.g., , affg. ; . The evidence is clear in this case that the ambiguous quitclaim deed, never recorded, purporting to convey to the Church an equity interest in petitioner's real property was not executed until February 23, 1981, a full month after petitioner had contracted to sell the property. At that point, petitioner had no legal alternative except to convey the property to the purchaser and thereby become entitled to the proceeds of the sale. The Church took whatever interest it received under the quitclaim deed subject to the contract of sale. It never had control over any interest in the property. 1987 Tax Ct. Memo LEXIS 244">249 The quitclaim deed, shown on the escrowee's closing statement as the reason for the payment of part of the sales proceeds to the Church, was an anticipatory assignment of income which does not protect petitioner from taxation on the full amount of the gain realized on the sale; he is entitled to a deduction only for the cash contribution. The correlative adjustments made in the notice of deficiency are also sustained. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. The quitclaim deed states: The Grantor DENNIS L. ANKENY for and in consideration of 8 percent of Sales price of the following convey and quit claim to Dunlap Baptist Church for Royal Brougham Memorial Fund the following described real estate, situated in the County of King State of Washington including any interest therein which grantor may hereafter acquire: Tract 3, Emerson Subdivision, according to the plat recorded in volume 38 of plats, page 27, in King County, Washington.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620836/	Estate of Johanna Ryan, a.k.a. Jane Ryan, Deceased, William J. O'Donnell, Executor, Petitioner v. Commissioner of Internal Revenue, RespondentEstate of Ryan v. CommissionerDocket No. 6108-72United States Tax Court62 T.C. 4; 1974 U.S. Tax Ct. LEXIS 128; 62 T.C. No. 2; April 8, 1974, Filed 1974 U.S. Tax Ct. LEXIS 128">128 Decision will be entered for the respondent. Petitioner refused to file the estate's Federal estate tax return until after respondent had withdrawn his opposition to a charitable deduction and consequently that return was not timely filed. Held: Respondent's conduct did not amount to any misrepresentation, nor was it misleading. It follows that the elements of an estoppel are lacking and respondent may invoke sec. 2032(c), I.R.C. 1954, to deny petitioner alternate valuation date treatment. Held, further, even granting that respondent may have adopted an erroneous position in opposing the charitable deduction, it was not proper for petitioner to refuse to timely file a return for the estate and his deliberate failure to do so deprives the estate of the alternate valuation date option. Barnabas B. B. Breed and William J. O'Donnell, for the petitioner.Richard M. Campbell, for the respondent. Forrester, Judge. FORRESTER62 T.C. 4">4 Respondent has determined a deficiency of $ 274.42 in petitioner's Federal estate tax. Petitioner has claimed an overpayment of $ 8,809.53 as to such tax. The only issue for our decision is whether petitioner, despite having failed to timely file a Federal estate tax return, may nonetheless elect alternate valuation date treatment for the estate under section 2032, I.R.C. 1954. 11974 U.S. Tax Ct. LEXIS 128">131 All the facts have been stipulated and they are so found.Johanna Ryan (decedent) died on March 15, 1967. The estate's executor, William J. O'Donnell (petitioner), filed the estate's Federal estate tax return on July 23, 1969, with the district director of internal revenue, Brooklyn, New York. At the date the petition herein was filed, petitioner's residence was New York, N.Y.62 T.C. 4">5 In her will decedent had set up a trust, the remainder interest of which was to pass to certain specified charities. By letter dated June 30, 1967, petitioner requested the Director of the Tax Rulings Division of the Internal Revenue Service to issue an actuarial remainder factor in order that he might compute the value of such trust remainder for charitable deduction purposes. On October 5, 1967, Ira H. Hansen (Hansen), Chief of the Estate and Gift Tax Branch of the Internal Revenue Service, wrote to petitioner advising him that because of a certain wasting assets provision in the will no charitable deduction would be allowed to the estate for the value of the remainder interest passing to charities. Such provision in the will, according to Hansen, appeared to permit the fiduciary under the trust1974 U.S. Tax Ct. LEXIS 128">132 to allocate or divert principal received from wasting assets to income, thereby making it impossible to tell what portion of the trust principal would be consumed by the income beneficiary during the term of the trust. Because Hansen so viewed the trust remainder, he did not compute for petitioner the actuarial remainder factor requested.On May 22, 1968, petitioner attended a conference in Washington, D.C., with Hansen and other members of his staff including Walter Halish (Halish) in order to discuss the Service's opposition to the charitable deduction. Hansen and Halish, however, refused to revoke the above-described letter ruling of October 5, 1967. On May 24, 1968, Halish telephoned petitioner and advised him that the Service would withdraw its opposition to the charitable remainder deduction on two conditions: first, that the life income beneficiaries and fiduciary file in the Surrogate's Court of Kings County, New York, disclaimers of all rights relating to the exercise of any power to allocate or divert principal in accordance with the wasting assets provision; and second, that all such disclaimers be approved by a decree of that court.On May 27, 1968, petitioner requested1974 U.S. Tax Ct. LEXIS 128">133 the district director in Brooklyn, New York, to grant a 6-month extension of the time in which petitioner would have to file an estate tax return. Without such extension, petitioner would have had to file a return for the estate by June 15, 1968, which was the date 15 months after decedent's death. 2 In his request, petitioner explained:Since it will take an appreciable amount of time to obtain court approval of said disclaimer and since under Treasury Regulations 20.2055-2(c) the disclaimer must be filed within the time provided for the filing of the estate tax return or any extension thereof, the undersigned hereby requests a six month extension to perfect the filing of the disclaimer and the transmittal of a certified copy of the court's decree approving the same to the Internal Revenue Service 62 T.C. 4">6 in Washington to permit the withdrawal of Mr. Hansen's letter to the undersigned dated October 5, 1967.Petitioner's request was granted by the Internal Revenue Service on June 5, 1968, and he was given until December 15, 1968, to file the estate's return.1974 U.S. Tax Ct. LEXIS 128">134 On June 11, 1968, disclaimers were duly executed and filed in the Surrogate's Court of Kings County, New York, and petitioner subsequently commenced a proceeding in said court for a ruling on the validity and effect of the disclaimers and the validity of the wasting assets provision in the will.Petitioner, on November 18, 1968, requested the district director in Brooklyn, New York, to grant a second 6-month extension of time in which to file the estate tax return. In this request, petitioner stated:A proceeding has been instituted in the Surrogate's Court of Kings County to obtain court approval of the Disclaimer described in said letter and jurisdiction is expected to be completed within the next two weeks.The decision in respect of said application cannot be reasonably expected prior to the extension date granted by your office to December 15, 1968. I therefore request an additional extension of time to file the return to and including June 15, 1969.This request for a second extension was denied on December 9, 1968, with the Service instructing petitioner to file the return "as soon as possible with an affidavit explaining the reason for the late filing." Petitioner, however, 1974 U.S. Tax Ct. LEXIS 128">135 failed to file the estate's return by December 15, 1968. On December 27, 1968, petitioner wrote to respondent explaining why he had not filed the return on time. In particular, he stated that he would not file a return until the Surrogate's Court in New York ruled on the validity of the above-described disclaimers:In view of the fact that approval of said disclaimer has not been forthcoming from the court, the undersigned, as above stated, is of the opinion that the filing of the return before the decision of the court may jeopardize the legal position of the estate in respect of the charitable remainder interest deduction and it is for this reason that the return was not and cannot be filed until such decision is handed down.On April 9, 1969, the Surrogate's Court of Kings County finally rendered its decision approving the validity and effectiveness of the disclaimers. Upon being advised of the court's ruling by petitioner, respondent, on June 16, 1969, withdrew his opposition to the charitable remainder deduction, and supplied petitioner with the previously requested actuarial factor.On July 23, 1969, petitioner filed the estate's Federal estate tax return, and elected thereon1974 U.S. Tax Ct. LEXIS 128">136 for alternate valuation date treatment under section 2032. In his statutory notice of deficiency, respondent 62 T.C. 4">7 determined that the estate was not entitled to elect the alternate valuation date option because of petitioner's late filing of the estate's return.OPINIONPetitioner, the executor of the Estate of Johanna Ryan, was told by respondent that the estate would be given no charitable deduction for the remainder interest of a particular trust unless petitioner obtained from the income beneficiaries and trustee irrevocable disclaimers of certain powers to deplete the principal of such trust. Respondent also made it a condition to withdrawal of his opposition to the deduction that petitioner obtain a ruling on the validity of such disclaimer from the Surrogate's Court in New York. Under section 2055, if a disclaimer is required in order that a particular legacy qualify as a charitable deduction, such disclaimer has to be made irrevocably before the expiration of the period for the filing of the estate's Federal estate tax return. Respondent's regulations further provide that "Ordinarily, a disclaimer made by a person not under any legal disability will be considered irrevocable1974 U.S. Tax Ct. LEXIS 128">137 when filed with the probate court." Sec. 20.2055-2(c)(2), Estate Tax Regs.Petitioner apparently acquiesced in respondent's demands that he obtain irrevocable disclaimers. Although the disclaimers were filed with the Surrogate's Court well within the extended period allowed for the filing of the estate's return, petitioner failed to file the estate's return until approximately 7 months after the expiration of such period. Because of such late filing, respondent refused to accept petitioner's election of alternate valuation date treatment, relying in his rejection on section 2032(c):(c) Time of Election. -- The election [of alternate valuation treatment] provided for in this section shall be exercised by the executor on his return if filed within the time prescribed by law or before the expiration of any extension of time granted pursuant to law for the filing of the return.Petitioner, pointing to what he considers are unfair and arbitrary actions on respondent's part, contends that respondent should not be allowed to interpose section 2032(c) in the instant case. We cannot agree with any of petitioner's arguments, and hold that respondent was correct in disallowing for the estate1974 U.S. Tax Ct. LEXIS 128">138 alternate valuation date treatment.Petitioner first argues that respondent should be estopped from denying alternate valuation date treatment. It is his position that because respondent erroneously refused to withdraw his letter ruling of October 5, 1967, until the Surrogate's Court had upheld the validity of the disclaimers, that petitioner was effectively prevented from filing the estate's return on time. In this position we find no merit.62 T.C. 4">8 It is elementary that before an estoppel can be raised, petitioner must demonstrate some type of misleading conduct on the part of the respondent upon which petitioner relied to his detriment. Sugar Creek Coal & Mining Co., 31 B.T.A. 344">31 B.T.A. 344, 31 B.T.A. 344">347 (1934); Staten Island Hygeia Ice & Cold S. Co. v. United States, 85 F.2d 68, 71 (C.A. 2, 1936); Smale & Robinson, Inc. v. United States, 123 F. Supp. 457">123 F. Supp. 457, 123 F. Supp. 457">463 (S.D. Cal. 1954); Elizabeth Lewis Saigh, 36 T.C. 395">36 T.C. 395, 36 T.C. 395">423 (1961). Here, we can make no finding of any such misleading conduct on respondent's part upon which petitioner could have relied to his detriment. 1974 U.S. Tax Ct. LEXIS 128">139 Respondent, in the instant case, refused to withdraw his opposition to petitioner's claim of a charitable deduction until the Surrogate's Court had ruled on the validity of the required disclaimers. However, respondent never in any way suggested that the filing of the estate's return could be delayed until the court had so ruled. Indeed, in his refusal to allow an additional 6-month extension to petitioner for the filing of the return -- a refusal dictated by section 6081 (a) 3 -- respondent explicitly called on petitioner to file his return "as soon as possible."Nor can we find any implication arising out of any of respondent's conduct or statements that petitioner would1974 U.S. Tax Ct. LEXIS 128">140 not be allowed any charitable deduction if he could not obtain approval of the disclaimer from the Surrogate's Court prior to filing of the estate's return. Indeed, petitioner, in his letter to respondent of May 13, 1969, specifically referred to section 20.2055-2(c), Estate Tax Regs., as requiring only that irrevocable disclaimers be filed with the Surrogate's Court before the return was due in order that such disclaimer might enable the estate to gain a charitable deduction under section 2055. Petitioner does not even contend that respondent led him to believe that the disclaimer would only be considered irrevocable as of the date when court approval was procured. It is clear to us, as it was clear to the parties, that the court's decree would judge the validity of the disclaimers as and when made. Once court approval was obtained, the disclaimers would have been considered valid and irrevocable as of the date when they were originally filed with the Surrogate's Court -- a filing which was actually accomplished well within the time allowed by the Code.It is clear from the correspondence that petitioner very much wanted to procure from respondent a favorable ruling on the charitable1974 U.S. Tax Ct. LEXIS 128">141 deduction before he filed the estate's return. This, however, was 62 T.C. 4">9 petitioner's own private wish -- and one clearly insufficient to successfully raise an estoppel against the respondent.Petitioner also argues that respondent treated him in an arbitrary and discriminatory manner by withdrawing his opposition to the estate's charitable deduction only after the Surrogate's Court had approved the disclaimers. Petitioner points out that section 20.2055-2 (c), Estate Tax Regs., clearly provides that, ordinarily, a disclaimer will be considered irrevocable, as required by section 2055, when such is filed with the Probate Court. While there may be validity in petitioner's assertion (see Harry C. Jaecker, 58 T.C. 166">58 T.C. 166, 58 T.C. 166">173-174 (1972), and New York cases cited therein), we do not see why his dispute with respondent should enable him to disregard a filing provision in the Code. It is common for disputes to arise between taxpayers and respondent as to the handling of a specific transaction. If a taxpayer remains unsatisfied with the treatment afforded him by respondent, his remedy is to seek judicial review of the matter. From petitioner's presence 1974 U.S. Tax Ct. LEXIS 128">142 before us, it is clear that he is aware of such ordinary judicial remedies, and his own action, of simply refusing to timely file the estate's return, cannot be justified.Petitioner urges that he would have prejudiced the estate's position if he had filed the return prior to receiving approval from the Surrogate's Court. He points out that he would have had to attach to the return respondent's letter ruling denying the charitable deduction to the estate. We fail to see how a timely filing would have in any way prejudiced petitioner. The ruling petitioner refers to refused to approve a charitable deduction for the remainder interest of a trust established under the decedent's will. However, such ruling did not in any way purport to judge the validity and effect of any possible disclaimers petitioner might procure. It is clear, under section 2055, and respondent's regulations interpreting that section, that the procurement of disclaimers would have introduced a totally new and very relevant fact into petitioner's tax situation.Petitioner, in fact, procured disclaimers within the period allowed by section 2055. And, while respondent refused to withdraw his opposition until the1974 U.S. Tax Ct. LEXIS 128">143 Surrogate's Court had approved the disclaimers, it is clear that petitioner should have nonetheless filed his return within the required time period. Estate of Frank Duttenhofer, 49 T.C. 200">49 T.C. 200, 49 T.C. 200">206-207 (1967), affd. 410 F.2d 302 (C.A. 6, 1969). Had petitioner so filed, we suspect that respondent, as he did in the instant case upon learning of the approval of the Surrogate's Court, would have withdrawn his opposition to the deduction. Had he not, petitioner could have pursued available judicial remedies.62 T.C. 4">10 As we mentioned above, it is not uncommon for taxpayers and the respondent to disagree on matters before a return is due. In the case of estate tax returns, when such dispute might be resolved by the procurement of additional information or by new circumstances, the regulations provide a clear and reasonable solution:(c) A return as complete as possible must be filed before the expiration of the extension period granted. The return thus filed will be the return required by section 6018(a) and any tax shown thereon will be the "amount determined by the executor as the tax" referred to in section 6161(a)(2), or the1974 U.S. Tax Ct. LEXIS 128">144 "amount shown as the tax by the taxpayer upon his return" referred to in section 6211(a)(1) (A). The return cannot be amended after the expiration of the extension period although supplemental information may subsequently be filed that may result in a finally determined tax different from the amount shown as the tax by the executor on the return. * * * [Sec. 20.6081-1(c), Estate Tax Regs.; emphasis supplied.]Clearly, petitioner should have timely filed and then sought a change in respondent's position after the ruling of the Surrogate's Court. Estate of Frank Duttenhofer, 49 T.C. 200">49 T.C. 206-207. Instead petitioner unilaterally imposed a condition on the filing of the return: that respondent first consent to the withdrawal of his letter ruling. Such was improper on petitioner's part, and we cannot countenance his actions.In conclusion, we find that petitioner's decision not to timely file an estate tax return was entirely of his own making, uninduced by any unfair conduct on the part of respondent. Since we have found such failure to have been both deliberate and totally unjustifiable, we need not reach the question of whether reasonable cause1974 U.S. Tax Ct. LEXIS 128">145 for failure to file a timely estate tax return may save for petitioner alternate valuation date treatment under section 2032. 4 We think petitioner in the instant case is in no better position than the petitioners in Estate of Frederick L. Flinchbaugh, 1 T.C. 653">1 T.C. 653, 1 T.C. 653">655 (1943), and Estate of Henry S. Downe, 2 T.C. 967">2 T.C. 967, 2 T.C. 967">970-971 (1943), who, apparently by mistake, or for other unexplained reasons, failed to file timely Federal estate tax returns, and were thus denied the alternate valuation date option. We hold that petitioner, having unjustifiably failed to file a timely estate tax return, is precluded by section 2032(c) from electing alternate valuation date treatment. Cf. Rosenfield v. United States, 156 F. Supp. 780">156 F. Supp. 780, 156 F. Supp. 780">783-784 (E.D. Pa. 1957), affirmed per curiam 254 F.2d 940 (C.A. 3, 1958), certiorari denied 358 U.S. 833">358 U.S. 833 (1958).1974 U.S. Tax Ct. LEXIS 128">146 Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954, as it applied to the years involved in the instant case.↩2. For decedents dying after Dec. 31, 1970, the filing time for the estate tax return is 9 months from date of death. Sec. 6075(a); Pub. L. 91-614, sec. 101 (b) and (j) (Dec. 31, 1970).↩3. SEC. 6081. EXTENSION OF TIME FOR FILING RETURNS.(a) General Rule. -- The Secretary or his delegate may grant a reasonable extension of time for filing any return, declaration, statement, or other document required by this title or by regulations. Except in the case of taxpayers who are abroad, no such extension shall be for more than 6 months.↩4. Two divisions of this Court have considered this issue and held that the option to elect alternate valuation date treatment is lost even though reasonable cause for failing to file a timely estate tax return is demonstrated. Estate of Fred B. Fisk, 11 T.C.M. 77, 78 (1952), reversed on other grounds 203 F.2d 358 (C.A. 6, 1953); Estate of Norma S. Bradley, T.C. Memo. 1974-17, 33 T.C.M. 70↩, 71-72 (1974).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620839/	CLIFTON J. BURWELL AND GINETTE A. BURWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBurwell v. CommissionerDocket No. 35669-84.United States Tax CourtT.C. Memo 1988-495; 1988 Tax Ct. Memo LEXIS 523; 56 T.C.M. 490; T.C.M. (RIA) 88495; October 13, 1988. Phillip K. Fife, for the petitioners. Irene Scott Carroll, David P. Fuller, and Harry Morton Asch, for the respondent. CLAPPMEMORANDUM FINDINGS OF FACT AND OPINION CLAPP, Judge: Respondent determined a deficiency in petitioners' 1988 Tax Ct. Memo LEXIS 523">525 Federal income tax of $ 18,026.90 for the taxable year 1977. After a concession by the parties, the issues for decision are 1) whether loans made by petitioner to a corporation in which petitioner was a one-third shareholder were business debts or nonbusiness debts under section 166(d)1 and 2) whether an investment tax credit claimed by petitioner on his 1976 tax return should be recaptured in 1976, the year the partnership which originally took the credit was transformed into a corporation, or in 1977, the year when the assets of the corporation were sold. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioners, Clifton J. Burwell and Ginette A. Burwell are husband and wife and resided in Northridge, California at the time they filed their petition. Ginette A. Burwell is a party in this case solely because she filed a joint tax return with her husband1988 Tax Ct. Memo LEXIS 523">526 for the year in issue. All references to petitioner will be to Clifton J. Burwell unless otherwise indicated. The adjustments at issue involve petitioner and his relationships with the former entities known as Rain Brain Manufacturing Co. Rain Brain or the partnership) and Aqua Brain Manufacturing Co. (Aqua Brain or the corporation). Petitioner was a partner or shareholder in both these entities with two other individuals, Oded E. Sturman (Sturman) and Benjamin Grill (Grill). Petitioner is a plumbing contractor and has been one since the age of 17. He also now operates a sprinkler control manufacturing company. Petitioner met Sturman and Grill in 1971 when he rented them office space in the building where his plumbing business was and still is located. Through this association, petitioner became involved with them in a corporate venture called Negev Products to manufacture sprinkler values and toilets. Petitioner's ownership share in Negev was 25 percent. In 1975, petitioner, Sturman and Grill formed Rain Brain, which operated from May 1, 1975 to April 8, 1976, without a written partnership agreement. The partnership was formed to develop and manufacture automatic lawn1988 Tax Ct. Memo LEXIS 523">527 sprinkler control products. Petitioner owned a 25-percent interest and was allocated 90 percent of the profits, losses, deductions and credits of Rain Brain. 2 It was the partner's intention, however, that petitioner would be a straight 25-percent partner once the company became profitable. Petitioner did not receive any regular compensation from salary or other means from Rain Brain in either 1975 or 1976. Petitioner claimed an investment tax credit for section 38 property during the 1976 year in the amount of $ 1,105 which investment tax credit was allocated to them on Rain Brain's Form 1065 return for 1976. There is no dispute between the parties that Rain Brain did purchase section 38 property in 1976 which generated this investment tax credit allocable to petitioner. The partnership ceased operating as of April 8, 1976. On March 11, 1976, the three partners formed a new corporation called Aqua Brain. 3 On or about April 8 or 9, 1976, the assets, including the asset which1988 Tax Ct. Memo LEXIS 523">528 was the basis for the $ 1,105 investment tax credit claimed by petitioners on their 1976 Form 1040 return, were transferred from Rain Brain to Aqua Brain. The partners decided to incorporate because each of them expected Aqua Brain to generate very substantial gross profits upon commencement of its manufacturing operations. 4 The partners decided against electing subchapter S treatment to keep the anticipated profits from being automatically allocated to them as income. The partners also decided not to sell, transfer or assign to Aqua Brain their respective undivided interests in the patents for the inventions covering Aqua Brain's product line. Aqua Brain began functioning as a corporation on or about April 8, 1976, for the purpose of manufacturing and marketing automatic battery-powered1988 Tax Ct. Memo LEXIS 523">529 control systems for sprinkler heads. From its inception, petitioner, Sturman and Grill were equal shareholders of Aqua Brain and each of them received 33-1/3 percent of that corporation's stock of 333 shares for $ 333 per person. Each was elected a corporate director. Petitioner was designated chief executive officer and president of Aqua Brain from April 8, 1976 to July 14, 1977, although he received no regular compensation or salary from Aqua Brain in either 1976 or 1977. He did, however, reimburse himself for expenses incurred in his duties. Petitioner expected to receive the same salary as each of the other two shareholders once the corporation was profitable. Petitioner worked for a deferred salary because he believed Aqua Brain would ultimately be very profitable. He also welcomed the career change. Because petitioner had hired a general manager to perform various duties connected with his plumbing business even prior to his relationship with Aqua Brain, he was left even more time to devote to the Aqua Brain corporation. Petitioner's responsibility as president of Aqua Brain was basically to run the company, i.e., sign the checks, run the ads and get sales started. Petitioner1988 Tax Ct. Memo LEXIS 523">530 had one full-time sales person on staff and did get the product sold in a number of stores. Petitioner was not involved with the production of the product, which was left to Sturman and Grill. During 1976 and 1977, petitioner made a series of short-term, 90-day interest-bearing loans to Aqua Brain and received the corporation's promissory notes in exchange. No additional shares were issued when loans were made to the corporation. A list of the loans made to Aqua Brain from petitioner are as follows: DateDue DatePrincipalInterestof Noteof NoteAmountRefundPaid4/12/767/12/76$ 69,111.96 Not repaid Not repaid1/06/774/06/776,000.00 Not repaid Not repaid1/31/775/01/776,600.00 Not repaid Not repaid3/08/776/06/774,000.00 Not repaid Not repaid3/15/776/15/77750.00 Not repaid Not repaid3/22/776/22/771,500.00 Not repaid Not repaid3/24/776/24/7715,700.00 Repaid in full Paid in full3/31/776/30/777,000.00 Not repaid Not repaid4/07/777/07/7710,307.39 Not repaid Not repaidTotal principalnot repaid$ 105,269.15Petitioner expected1988 Tax Ct. Memo LEXIS 523">531 all of his loans to Aqua Brain to be repaid with interest at 10 percent. This was not to be. On or before July 14, 1977, petitioner, Sturman and Grill had a disagreement which resulted in Sturman and Grill calling a special meeting of the shareholders and the directors of Aqua Brain. Sturman and Grill voted to oust petitioner from his position as president and corporate officer of Aqua Brain and eliminate his power to sign checks on the corporation's bank account. Thereafter, Sturman and Grill managed Aqua Brain's operations. The corporation, however, had operated at a loss throughout its existence and ceased doing business in 1977, rendering the $ 105,269 of promissory noted held by petitioner worthless. Aqua Brain made no interest payments in 1976 or 1977 on any of the loans represented by the $ 105,269 of promissory notes. In August 1977, Barclay's Bank, which had loaned Aqua Brain substantial funds through a credit line, filed suit against Aqua Brain and the petitioner. Petitioner, Sturman and Grill each had guaranteed repayment of the bank loans by Aqua Brain via identical, separate continuing quaranties executed on June 7, 1976. The bank foreclosed its lien on certain1988 Tax Ct. Memo LEXIS 523">532 tangible assets of Aqua Brain in 1977. The tangible assets of Aqua Brain on which Barclay's Bank had foreclosed were sold at a public auction on or about October 31, 1977. One of the assets sold was the asset which was the basis of the investment tax credit claimed on petitioner's 1976 tax return. Petitioner was the high bidder at that public auction paying $ 68,000 for all of the tangible assets of Aqua Brain. Most of petitioner's income from 1977 as reported on their 1977 U.S. Individual Income Tax Return was received from their positions as employees of Burwell Plumbing Company. Throughout 1976 and 1977, petitioner continued to spend time on his plumbing business. Aqua Brain and petitioner's plumbing business were located in the same general facilities. OPINION The first issue for consideration is whether petitioner's debts constituted business or nonbusiness bad debts. Full deductibility from ordinary income is allowed for the worthlessness of business bad debts whereas worthless nonbusiness bad debts are accorded short-term capital loss treatment. Sections 166(a), 166(d). In order to qualify as a business bad debt the debt must have been created or acquired in connection1988 Tax Ct. Memo LEXIS 523">533 with a trade or business of the taxpayer, see section 166(d)(2)(A), or the loss must have been incurred in petitioner's trade or business. Section 166(d)(2)(B). 5 It is well established that being an employee may be a trade or business for purposes of section 166. See Putoma Corp. v. Commissioner,66 T.C. 652">66 T.C. 652, 66 T.C. 652">673 (1976), affd. 601 F.2d 734">601 F.2d 734 (5th Cir. 1979). In order for petitioner to prevail, petitioner must establish first that he was in a trade or business and then that the loss resulting from the worthlessness of the debt bears a proximate relationship to the trade or business in which he was engaged at the time the debt became worthless. See section 1.166-5(b), Income Tax Regs. The test for determining whether a particular debt bears a proximate relationship to the taxpayer's trade or business was set forth by the Supreme Court in 1988 Tax Ct. Memo LEXIS 523">534 United States v. Generes,405 U.S. 93">405 U.S. 93, 405 U.S. 93">103 (1972), as follows: In determining whether a bad debt has a "proximate" relation to the taxpayers's trade or business, as the Regulations specify, and thus qualifies as a business bad debt, the proper measure is that of dominant motivation, and that only significant motivation is not sufficient.Thus, a taxpayer may establish the requisite "nexus" by proof that his dominant motivation in incurring the debt was to protect his employment. See 405 U.S. 93">United States v. Generes, supra;Shinefeld v. Commissioner,65 T.C. 1092">65 T.C. 1092 (1976). The determination of petitioner's dominant motive is essentially a factual inquiry, and the burden of proof is on petitioner. See 66 T.C. 652">Putoma Corp. v. Commissioner, supra at 673. Moreover, petitioner's testimony regarding his dominant motive for making the loans must be examined objectively in light of the overall record. Petitioner argues that the loans to Aqua Brain were made with the dominant purpose of protecting an employment from which he reasonably expected to be paid substantial compensation and were not made for the dominant purpose of either1988 Tax Ct. Memo LEXIS 523">535 earning interest income or for protecting an investment interest. Respondent counters that petitioner cannot rely on being an employee of Aqua Brain to establish that he was in a trade or business for the purposes of section 166 and that, even if the Court determines that petitioner entered into such a trade or business at some point, petitioner's employee status was not his dominant motive for making the loans to Aqua Brain. While he find that the record supports petitioner's contention that he was an employee of Aqua Brain, we nevertheless conclude that petitioner's dominant motive in making the loans was not to protect his employment. Petitioner did not receive any salary at all from Aqua Brain. Putting funds at risk under such circumstances is more characteristic of an investor. While there is no specific rule requiring that a taxpayer receive salary while he incurred the debts in order for it to be related to his trade or business, 6 it is still more the rule than the exception. As stated in 66 T.C. 652">Putoma Corp. v. Commissioner, supra at 674, "a loan motivated by one's status as an employee seems more plausible where it objective is to protect a present salary1988 Tax Ct. Memo LEXIS 523">536 rather than promote a future one." Petitioner's contentions that the loans were forwarded only under the belief that the corporation would immediately make profits and that he would be returned his deferred salary plus receive large future salaries, while plausible, is unconvincing in light of the other available facts. Petitioner had full employment as a plumbing contractor and received a salary from that business, totalling almost $ 80,000 in 1976. It is unlikely that an employee with job security elsewhere would have risked such a large sum of money to protect another job on the basis of promises of future rewards. Petitioner's behavior is more typical of an investor who has the desire to see his product on the market and was willing to risk the extra funds to see that dream fulfilled. See 65 T.C. 1092">Shinefeld v. Commissioner, supra at 1099. Other indications of a lack of a dominant employment motive was that there was no written employment contract between Aqua Brain and petitioner, and all three shareholders would be earning equal1988 Tax Ct. Memo LEXIS 523">537 salaries once Aqua Brain became profitable. Petitioner argues nevertheless that it would be ludicrous to suggest that his dominant motive in making the loans was to protect a stock investment for which he paid $ 333 in cash. That being the case, the logical inference was that petitioner wanted to protect and preserve his position as its president, a position he anticipated would garner him very substantial ordinary income. We do not similarly interpret this set of circumstances. Petitioner and his two corporate partners originally capitalized the corporation with only $ 999, yet petitioner's testimony established that petitioner knew that a great deal more money was necessary to get the product off the ground. Petitioner testified that "if we could get together $ 50,000, we could take that product, take it -- get in into the marketplace * ." In fact, petitioner invested almost $ 70,000 within the first 3 months of operation. Petitioner's dominant motive in making these loans was a desire to get the sprinkler system production off the ground and to ensure the continuing success of Aqua Brain as well as protect his investment in the patents. 7 As suggested in Putoma Corp.1988 Tax Ct. Memo LEXIS 523">538 , where a taxpayer consistently lends money to corporations in which he has an interest, this pattern appears more investment related than business related. Petitioner in the instant case had also loaned money to Rain Brain. Petitioner had been trying to produce this product for a number of years and knew that additional capital was necessary to finance the manufacture of the product. Moreover, that petitioner was not issued any more stock upon making his loans to Aqua Brain does not preclude an investment motive as the purchase of stock is not the only way to make an investment. 1988 Tax Ct. Memo LEXIS 523">539 Petitioner continues, however, that his status as a minority shareholder precluded a meaningful investor position for him in Aqua Brain. His reward, rather, lay in the compensation his job as president of the company would provide. He made these loans under circumstances that a mere investor would never find acceptable. We find this argument unconvincing. Petitioner had been friendly with Sturman and Grill since 1971, and as petitioner's wife testified, "It wasn't only business between us. We had a friendship." He had invested with them in prior enterprises. He obviously trusted them. That Sturman and Grill ultimately turned on petitioner and stripped him of any power in Aqua Brain is merely hindsight. At the time petitioner entered into his investment with Sturman and Grill, each of the parties was a one-third equal shareholder, and each was promised an equal salary and fringe benefits, despite the position held. We find that petitioner's dominant motive in making the loans to Aqua Brain was not related to his status as an employee or proximately related to his trade or business. While petitioner desired a career change and worked hard as Aqua Brain's chief executive officer, 1988 Tax Ct. Memo LEXIS 523">540 petitioner made the loans primarily to produce future profits through Aqua Brain and protect his investments in the patents. We must next consider the proper year that the investment tax credit claimed by petitioners on their 1976 tax return should be recaptured, which turns on when the section 38 property at issue ceased to be so with respect to petitioner. There is no dispute between the parties that Rain Brain did purchase section 38 property in 1976 which generated an investment tax credit allocable to petitioners in the amount previously stated and that petitioners are entitled to the $ 1,105 investment tax credit which was distributed to them in 1976 from Rain Brain. There is also no dispute concerning the transfer of the section 38 asset. It was stipulated that when Aqua Brain was formed, it took possession of an treated as its property all the tangible assets formerly held by Rain Brain including the assets which was the basis of the $ 1,105 investment tax credit claimed petitioners on their 1976 Form 1040. It was also stipulated that in August 1977, Barclay's Bank foreclosed on all the assets of Aqua Brain and in October 1977, the section 38 property was sold. The section1988 Tax Ct. Memo LEXIS 523">541 38 property was therefore disposed of at most slightly more than 18 months after it was originally acquired by the partnership, which is clearly less than the 5 to 7 years estimated useful life reported by the partnership and originally used in computing the claimed investment tax credit. Section 47(a)(1) requires the taxpayer to recapture investment credits taken pursuant to section 38 to the extent any of the underlying "property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, before the close of the useful life which was taken into account in computing the credit under section 38." Section 47(a)(1). Section 47(b) provides an exception to section 47(a)(1) when the property is disposed of by a mere change in the form in conducting the trade or business so long as the property is retained in such trade or business as section 38 property and the taxpayer retains a substantial interest in such trade or business. Section 1.47-3(f)(1)(ii), Income Tax Regs., sets forth the requirements for a disposition to qualify as a mere change in the form of conducting the trade or business as follows: (a) The section 38 property * * is retained as1988 Tax Ct. Memo LEXIS 523">542 section 38 property in the same trade or business, (b) The transferor (or in a case where the transferor is a partnership, estate, trust, or electing small business corporation, the partner, beneficiary, or shareholder) of such section 38 property retains a substantial interest in such trade or business. (c) Substantially all the assets (whether or not section 38 property) necessary to operate such trade or business are transferred to the trasferee to whom such section 38 property is transferred, and (d) The basis of such section 38 property in the hands of the transferee is determined in whole or in part by reference to the basis of such section 38 property in the hands of the transferor. In this instance, petitioner and respondent agree that petitioners have satisfied subsections (a), (c) and (d) of section 1.47-3(f)(1)(ii), Income Tax Regs., and that the issue to be decided is whether petitioner retained a substantial interest. Section 1.47-3(f)(2), Income Tax Regs., defines substantial interest as follows: (2) Substantial interest. For purposes of this paragraph, a transferor (or in a case where the transferor is a partnership, estate, trust, or electing small business1988 Tax Ct. Memo LEXIS 523">543 corporation, the partner, beneficiary, or shareholder) shall be considered as having retained a substantial interest in the trade or business only if, after the change in form, his interest in such trade or business -- (i) Is substantial in relation to the total interest of all persons, or (ii) Is equal to or greater than his interest prior to the change in form. Thus, where a taxpayer owns a 5-percent interest in a partnership, and, after the incorporation of that partnership, and taxpayer retains at least a 5-percent interest in the corporation, the taxpayer will be considered as having retained a substantial interest in the trade or business as of the date of the change in form. Petitioner argues that he did not retain a substantial interest in Aqua Brain because under the Rain Brain partnership agreement, he was entitled to have allocated to him 90 percent of its profits, losses, credits and deductions. While he owned a theoretical 25-percent interest of any net capital which that partnership ever acquired, it never acquired any net capital. Thus, with the formation of Aqua Brain and the transfer to it of the assets of the partnership, he went from a position of being1988 Tax Ct. Memo LEXIS 523">544 entitled to 90 percent of any income Rain Brain might have made to a position of being entitled to 33-1/3 percent of any dividends Aqua Brain might ever declare on its common stock. Thus, there was a substantial decrease in his interest, and recapture is required in the year the partnership transferred the assets, or 1976. Respondent, on the other hand, contends that petitioner held a 25-percent interest in Rain Brain (notwithstanding a temporary 90-percent allocation of losses, profits, credits and deductions), and after the section 351 tax free organization held a 33-1/3 interest in Aqua Brain. This is a substantial interest not only in relation to the interests of the other shareholders, but it also equal to or greater than petitioner's interest prior to the change in the form of conducting business. We agree with respondent. We find that petitioner's 90-percent allocation of profits, losses, credits and deductions was in fact meant to be a temporary allocation. While testifying, petitioner himself reiterated this fact: Q. Well, what was your understanding about your partnership interest when you first formed it, before -- with Sturman and Grill? What percentage did you1988 Tax Ct. Memo LEXIS 523">545 think you owned? A. Well, -- Q. Of Rain Brain? A. I had 25 percent of Rain Brain. Q. And after the first year, when you saw that there were losses, it was agreed that you'd take 90 percent of the losses in the first year, and the credits, is that correct? A. Well, that was set up before that, but that was all discussed before that. Q. So -- A. Of profit and losses. Q. So, the intention had you remained in the partnership, was once the company became profitable, you would be a 25-percent partnership partner at that point, is that correct? Once all your loans to the partnership were repaid? A. That's right, once everything was backed down, yes.This indicates that petitioner's percentage ownership interest in Rain Brain was 25 percent and that his ownership interest in Aqua Brain, being 33-1/3 percent, was equal to or greater than that of his interest in Rain Brain. We also agree with respondent that the section 351 tax free reorganization from a partnership to a corporate form was a mere change in form within the meaning of section 1.47-3(f), Income Tax Regs., and not a disposition of the partner's interest pursuant to section 1.47-69a), as contended1988 Tax Ct. Memo LEXIS 523">546 by petitioner. 8In determining what constitutes a mere change of form, it was stated in Baker v. United States,398 F. Supp. 1143">398 F. Supp. 1143, 398 F. Supp. 1143">1151 (W.D. Texas 1975) that the controlling factors are "whether there is an unimpaired continuity of the essential business enterprise in a new form and whether the former owners of proprietory interest continue as such." The court in Baker also noted that a factual review was required to determine whether the same trade or business was conducted by the transferee as was conducted by the transferor. Moreover, in Ramm v. Commissioner,72 T.C. 671">72 T.C. 671, 72 T.C. 671">675 (1979), we note that the legislative history of section 47(b) indicates that Congress intended that the trade or business remain intact after the change in form. We have such a situation before us. Rain Brain ceased operating on April 8, 1976, the same date that Aqua Brain began functioning as a corporation. Aqua Brain took possession of and treated as its property all of the tangible1988 Tax Ct. Memo LEXIS 523">547 assets formerly held by Rain Brain, including the asset which was the basis of the investment tax credit claimed by petitioner. Thus, while technically the property may have passed from the partnership to the petitioners and back to the corporation all within a very short time, this is a technicality which does not change the substance of the transaction. The facts bear out that the corporate entity began on the same date that the partnership ceased operation and involved the same assets, the same individuals and the same product. The change in form was motivated purely for tax reasons, not to initiate a change in the type of business operated. The business itself remained intact. Additionally, the record is unclear as to what actually transpired during the section 351 reorganization. The partners each contributed cash for their stock in Aqua Brain, but the tangible assets were directly transferred to the corporation. That being the case, we can only conclude that the section 351 reorganization was a mere change in form and that petitioner retained a substantial interest in the trade or business in which the section 38 property was employed. The proper year for recapture is1988 Tax Ct. Memo LEXIS 523">548 therefore 1977. We finally address one additional argument set forth by petitioner. Petitioner contends that if one accepts respondent's proposition that the transition in 1976 from the Rain Brain partnership to the Aqua Brain corporation was no more than a mere change in the form of ownership of the underlying business, we must also determine that the sale in 1977 of these same assets to petitioner by auction was also a mere change in the form of ownership of the underlying business, which should preclude any recapture or further tax. This argument was raised for the first time on brief and is not entitled to consideration. In any event, petitioner's analysis is flawed. Petitioner cannot and has not established that each element of the four part test set forth in section 1.47-39f)(1)(ii), Income Tax Regs., is satisfied by petitioner's purchase of the property as the successful bidder at the foreclosure sale. First, petitioner has failed to fully demonstrate either that the transferor, Aqua Brain, retained a substantial interest in the property or that the property was used in the same trade or business. Further, section 1.47-3(f)(1)(ii) provides that the property's basis in1988 Tax Ct. Memo LEXIS 523">549 the hands of the transferee must be determined in whole or in part by reference to the basis of such property in the hands of the transferor, Aqua Brain. The evidence in this case suggests that petitioner's purchase of the property by bidding at an open auction sale requires a new basis calculation based on the amount paid by petitioner at the foreclosure sale. That being the case, we find that the exception to the recapture requirement for a mere change in form does not apply to a foreclosure sale. Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. ↩2. Petitioners had claimed losses with reference to the Rain Brain partnership of $ 34,373 in 1975 and of $ 34,193 in 1976 on their 1975 and 1976 U.S. Individual Income Tax Returns, respectively. ↩3. The tax consequences of this change from the Rain Brain partnership to the Aqua Brain corporation using the section 351 tax free exchange provisions as they apply to petitioner's 1976 tax return were determined by this Court in Burwell v. Commissioner,T.C. Memo. 1985-583↩. 4. Sturman projected that within 5 years the company would have a gross profit of $ 2,500,000. ↩5. Neither party contends that petitioner was in the trade or business of making loans for the purposes of section 166, as his lending activities were generally confined to corporations in which he had an interest. See Whipple v. Commissioner,373 U.S. 193">373 U.S. 193↩ (1963). 6. See Pierce v. Commissioner,T.C. Memo. 1986-552; Goodenough v. Commissioner,T.C. Memo. 1980-28↩. 7. Petitioner's willingness to loan money to Aqua Brain in order to protect his interest is highlighted by his testimony concerning his desire to get the patents into the corporation when trouble between him and Sturman and Grill began. Petitioner testified: I even offered to pay them $ 40,000 to make sure that those patents were assigned exclusively into the corporation for [so] all the rights to producing that product would be in the corporation. * * * I got to be extremely concerned that * * * all this money was in this corporation and the corporation did not have the patents to produce the product." ↩8. Section 1.47-6(a), Income Tax Regs.↩, sets forth the requirements of the investment tax credit recapture where there is a disposition of a partner's interest in the partnership.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620840/	OVERLAND KNIGHT CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Overland Knight Co. v. CommissionerDocket No. 19366.United States Board of Tax Appeals15 B.T.A. 870; 1929 BTA LEXIS 2770; March 15, 1929, Promulgated 1929 BTA LEXIS 2770">2770 The petitioner kept its books of account for 1923 upon the accrual basis. Held, that it is entitled to deduct from gross income interest accrued upon its indebtedness at the close of 1923 and charged as a liability upon its books. E. C. Gruen, C.P.A., for the petitioner. Arthur Carnduff, Esq., and S. B. Anderson, Esq., for the respondent. SMITH 15 B.T.A. 870">870 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1923 in the amount of $704.16. Petitioner alleges that respondent erred in that he disallowed a deduction taken by the petitioner on account of interest in the amount of $5,633.33. FINDINGS OF FACT. Petitioner is a New York corporation conducting an automobile sales agency in the City of Buffalo. It was incorporated on January 31, 1923, with an authorized capital stock of $200,000 divided into 1,000 shares of common stock and 1,000 shares of preferred stock of a par value of $100 each. Mason B. Hatch and Allen T. McKay, residents of the City of Buffalo, in 1922 had the opportunity to acquire the general agency in Buffalo and vicinity of Overland-Knight automobiles and associated products. 1929 BTA LEXIS 2770">2771 Neither had the capital necessary to assume the agency and their overtures to banks and acquaintances in Buffalo for capital were unsuccessful. They then appealed to George A. Ball, Muncie, Ind., a brother-in-law of Hatch and a man of means, for a loan of $100,000. They proposed to him the incorporation of a company with that amount of capital to operate the sales agency. He finally agreed to and did loan the money to the corporation, informing them at the time that he did not want to make a long-time investment 15 B.T.A. 870">871 in anything. As security Hatch and McKay gave Ball their individual notes secured by the total shares of stock of the company. Interest was to be paid upon the loan at the rate of 6 per centum per annum. No note of the petitioner was given to Ball for it was the desire of Hatch and McKay that the indebtedness of the petitioner to Ball should not appear in any statements made by the petitioner to banks or dealers. The understanding of all the parties concerned was that Ball should return to Hatch and McKay the $100,000 of preferred stock and $60,000 par value of common stock turned over to Ball as security. Ball was, however, to retain $40,000 of the common1929 BTA LEXIS 2770">2772 stock. The issuance of the preferred stock was never authorized by any action of the board of directors of the petitioner, and, of the common stock turned over to Ball, $40,000 was issued to him direct and the balance, $60,000, was endorsed to him by Hatch, McKay, and Beardsley, the incorporators of the company. The books of account of the petitioner for 1923 were kept upon the accrual basis. The cashbook of the company shows the receipt from Ball of $100,000. Upon closing the books of account at December 31, 1923, there was set up a liability to Ball under the title of "Payment of Interest on Preferred Stock" in the amount of $5,633.33. In its tax return for 1923, the petitioner claimed the deduction from gross income of this amount as interest accrued. The deduction was disallowed by the respondent in the computation of the deficiency. OPINION. SMITH: The issue in this case is whether or not the petitioner was entitled to a deduction from gross income for the calendar year 1923 of a sum amounting to $5,633.33. In the deficiency notice mailed to the petitioner the respondent disallowed the deduction on the ground that it represented a dividend on preferred stock. In1929 BTA LEXIS 2770">2773 its petition the petitioner alleges as follows: 4. The determination of tax set forth in the said notice of deficiency is based upon the following errors: The Commissioner of Internal Revenue has incorrectly disallowed interest paid as an item of interest on preferred stock. 5. The facts upon which the petitioner relies as the basis of this proceeding are as follows: The interest item in question was accrued on the books of the petitioner as due on a loan of monies. Shares of preferred stock were held as security for the loan. An error in bookkeeping termed the interest as "payment of interest on preferred stock." These allegations were denied by the respondent in his answer as follows: 4. Admits that in determining the deficiency the Commissioner disallowed as a deduction an item alleged to be interest paid on preferred stock, denies that 15 B.T.A. 870">872 the said item was in fact interest paid, and denies that the Commissioner erred in disallowing a deduction on account thereof. 5. Denies that the item in question was accrued on the books of the petitioner as due on a loan of monies. Denies that shares of preferred stock were held as security for the said alleged1929 BTA LEXIS 2770">2774 loan. Admits that the item was termed "payment of interest on preferred stock", and denies that the item was erroneously so termed. On brief, counsel for the respondent argued (1) that if the charge of $5,633.33 is to be regarded as a charge for an accrued dividend, it can not be allowed as a deduction; (2) that the petitioner incurred no liability for interest and paid no interest during the taxable year under review; and (3) that the loan was in fact made to the individuals for the purpose of forming the petitioner corporation, Ball taking all the security he could get. Counsel for the respondent further argues on brief that the test of the transaction is against whom could Ball recover a judgment should he sue to recover the money advanced? In this proceeding Ball testified that he loaned the money to the petitioner corporation. The evidence indicates that he was to receive interest upon the loan from the corporation at the rate of 6 per centum per annum. The books of account were kept upon the accrual basis and the petitioner's tax return for 1923 was made upon that basis. There appears to be no question that the corporation was to pay the interest upon the indebtedness1929 BTA LEXIS 2770">*2775 and that the amount of $5,633.33 set up on the petitioner's books of account at the close of 1923 as interest which had accrued upon the debt was a proper accrual of the interest. The claim of the petitioner that the amount is a legal deduction from gross income is sustained. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620841/	Stofflet and Tillotson, Petitioner, v. Commissioner of Internal Revenue, RespondentStofflet & Tillotson v. CommissionerDocket No. 64297United States Tax Court32 T.C. 1031; 1959 U.S. Tax Ct. LEXIS 109; August 11, 1959, Filed 1959 U.S. Tax Ct. LEXIS 109">109 Decision will be entered under Rule 50. 1. All of the stock of petitioner corporation, a construction enterprise, was held by officers and employees of the corporation. On January 25, 1951, an agreement to sell their stock to new stockholders for a stated consideration was entered into. At the time of this agreement there were three contracts which, for all practical purposes, had been completed by petitioner corporation and it was agreed by the parties that when the final amounts were received by petitioner on these contracts, such payments would be disbursed by petitioner to the old stockholders. The amounts to be disbursed to the old stockholders were agreed upon on July 24, 1951. The amount was $ 12,888.27. Petitioner claimed this amount in an amended return filed in 1953 as a deduction for executives' salaries in 1951, thereby increasing its net operating loss for 1951 by that amount. The Commissioner disallowed the deduction in his determination of petitioner's 1951 net operating loss carryover to 1953. Held, the Commissioner is sustained. The $ 12,888.27 did not represent executives' salaries incurred by petitioner in 1951 and was not a deductible payment.2. 1959 U.S. Tax Ct. LEXIS 109">110 When the amount which petitioner corporation was to disburse to the old stockholders on account of the three contracts was agreed upon by the parties, July 24, 1951, petitioner did not have sufficient funds with which to make the distribution. A note was executed for the amount agreed upon, payable to Herbert M. Stofflet, who was acting for himself and the other old stockholders. The note was made payable January 24, 1952, and included interest in the body of the note to that date. The note was not paid until May 23, 1952. A total of $ 648.73 interest was incurred and paid on the note in 1952, and was claimed by petitioner as a deduction for interest. The Commissioner, in computing petitioner's net operating loss for 1952, disallowed the deduction. Held, the note was the obligation of petitioner and the $ 648.73 interest which petitioner incurred and paid in 1952 on this note is deductible as interest. The Commissioner's disallowance of the deduction is not sustained. Aaron M. Diamond, Esq., for the petitioner.William C. Baskett, Esq., for the respondent. Black, Judge. BLACK 32 T.C. 1031">1032 The respondent determined a deficiency in the income tax and excess profits1959 U.S. Tax Ct. LEXIS 109">111 tax of the petitioner for the taxable year 1953 in the amount of $ 8,868.46.The computation of the tax as made by respondent and the reasons for the adjustments are contained in the statutory notice mailed to petitioner on June 25, 1956. 11959 U.S. Tax Ct. LEXIS 109">112 The petitioner, by assignments of error, contests the adjustments made by the Commissioner to the net operating loss carryover from 1951 and 1952 to 1953 claimed by petitioner.The issues here presented are: (1) Whether the amount of $ 12,888.27 paid to Herbert M. Stofflet in 1951 by judgment note is deductible by petitioner as a business expense for executives' salaries, and (2) whether the amount of $ 648.73 paid to Herbert M. Stofflet in 1952 was interest on an obligation of petitioner and is deductible by petitioner as interest.FINDINGS OF FACT.A stipulation and a supplemental stipulation of facts have been filed and are incorporated herein by reference.Petitioner is a corporation organized and existing under the laws of Pennsylvania with its principal office located in Philadelphia. Petitioner's principal business activity is building construction.Petitioner employed an accrual basis completed-contract method of accounting and filed United States corporation income tax returns for the calendar years 1950 to 1953, inclusive, as follows: For the 32 T.C. 1031">1033 year 1950 with the collector of internal revenue, first district of Pennsylvania; for the year 1951 (an original and an1959 U.S. Tax Ct. LEXIS 109">113 amended return) with the collector of internal revenue, first district of Pennsylvania; for the year 1952 with the director of internal revenue, Philadelphia; and for the year 1953 with the district director of internal revenue, Philadelphia.Prior to January 25, 1951, petitioner entered into construction contracts with Chester Housing Authority, National Bank of Germantown and Trust Company, and Harshaw Chemical Company. As of that date petitioner had substantially completed these contracts, but had not received the net proceeds due it as retainages.On January 25, 1951, and until March 5, 1951, the total outstanding capital stock of petitioner was 580 shares distributed as follows:NameSharesHerbert M. Stofflet200Charles W. Shartzer200Winona M. Evans50Herman H. Michner50Leslie R. Goodell50Percy Martin Swank30580This group of shareholders is hereinafter referred to as the sellers. The sellers were all employees or officers of petitioner prior to January 25, 1951.On January 25, 1951, the sellers entered into an agreement with Henry David Epstein & Co., Inc., Jordan P. Snyder, and John Frost, hereinafter referred to as the purchasers, for the 1959 U.S. Tax Ct. LEXIS 109">114 sale of the capital stock of petitioner. The purchasers agreed to pay for the stock a sum which represented the cash balance in petitioner's bank account, plus a sum equal to the appraised value of petitioner's inventory. 21959 U.S. Tax Ct. LEXIS 109">115 32 T.C. 1031">1034 The sellers agreed that petitioner would have no contracts for the purchase or sale of merchandise or supplies, except in connection with the three aforementioned construction contracts; and both purchasers and sellers agreed that income or expenses involved in the three specific contracts would become the property of the sellers 3 and would be paid over to them by the corporation. The sellers also agreed that on the settlement, each would deliver an executed release discharging petitioner from any liability to them, for the purpose of inducing purchasers to buy the stock.1959 U.S. Tax Ct. LEXIS 109">116 A separate clause appended to the agreement following the signatures of the purchasers and the sellers stated that petitioner agreed to the terms of the agreement and further agreed to do whatever was necessary to complete its obligations under the agreement. This clause was signed by Herbert M. Stofflet (hereinafter referred to as Stofflet) as petitioner's president and attested by Winona M. Evans as petitioner's secretary.The agreement was made in Philadelphia, Pennsylvania, and contemplated performance in the same place.On March 5, 1951, all the stock owned by the sellers was transferred to the purchasers and the purchasers paid as consideration therefor $ 66,403.20 in cash and gave four notes of $ 4,250 each. None of these amounts is in controversy. At the same time releases, executed by the sellers, discharging petitioner from any and all claims accruing to the sellers up until the time of settlement, were delivered for the purpose of inducing the purchasers to consummate the agreement of January 25, 1951.32 T.C. 1031">1035 Stofflet acted as agent for the sellers throughout the stock sale transaction.Between March 5, 1951, and July 24, 1951, Stofflet, acting as agent for the sellers, 1959 U.S. Tax Ct. LEXIS 109">117 met with the purchasers for numerous discussions concerning the balance due the sellers under the provisions of paragraph 8(c) of the agreement of January 25, 1951, as to the proceeds of the three aforementioned contracts. The purchasers finally agreed that petitioner corporation should pay and Stofflet, acting as agent for the sellers, agreed to accept a promissory note for $ 13,292.06 as the full amount due the sellers as proceeds from these contracts. This $ 13,292.06 promissory note included $ 12,888.27 which the parties had agreed was due the old stockholders under the terms of the contract and included $ 403.79 as interest to the due date of the note. On July 24, 1951, the purchasers, on behalf of petitioner corporation, executed their personal judgment note to Stofflet in the amount of $ 13,292.06. The note was due January 24, 1952, and bore interest at the rate of 6 per cent per annum from its due date.On May 15, 1952, officers of petitioner executed, and on May 22, 1952, the appropriate collector received, petitioner's corporation income tax return for 1951. Items 1 to 31 of the return were not completed, and reference was made to attached schedules. By the profit 1959 U.S. Tax Ct. LEXIS 109">118 and loss statement attached to this return, petitioner showed an accrued gross profit from completed contracts of $ 9,457.67, general and administrative expenses of $ 46,178.57, and, after other adjustments, a net operating loss of $ 18,274.79. Included in the general and administrative expenses were executives' salaries of $ 19,949.18, of which (as shown by a schedule of compensation of officers) $ 9,269.18 was paid to Stofflet as president.On May 23, 1952, petitioner paid by check drawn to the order of Stofflet the sum of $ 13,537. This check was delivered to, and received by Stofflet in full discharge of the judgment note of July 24, 1951, with interest of $ 244.94 from January 24, 1952, the due date of the note.On April 21, 1953, officers of petitioner executed, and on April 23, 1953, the appropriate director received, petitioner's amended corporation income tax return for 1951. Items 1 to 31 of the return were not completed, and reference was made to attached schedules. By a profit and loss statement, attached to this return, petitioner still showed an accrued gross profit from completed contracts of $ 9,457.67, but general and administrative expenses of $ 59,066.84 (an 1959 U.S. Tax Ct. LEXIS 109">119 increase of $ 12,888.27 over that shown on the original return), and a net operating loss of $ 31,163.06 (an increase of $ 12,888.27 over that shown on the original return). Included in the general and administrative expenses were executives' salaries of $ 32,837.45 (an increase of $ 12,888.27 over that shown on the original return), of which, as shown by a schedule of compensation of officers, $ 22,157.45 was paid to Stofflet 32 T.C. 1031">1036 as president (an increase of $ 12,888.27 over that shown on the original return).On March 12, 1953, officers of petitioner executed, and thereafter the appropriate director received, petitioner's corporation income tax return for 1952. Items 1 to 31 of the return were not completed, and reference was made to attached schedules. By the profit and loss statement attached to the return petitioner showed a net operating loss of $ 36,885.72. One of the deductions taken to produce this net loss was interest paid in the amount of $ 761.23. The $ 761.23 interest item included $ 648.73 accrued interest on the note of $ 13,292.06 dated July 24, 1951. The Commissioner disallowed the deduction of $ 648.73 on the ground that it was not paid on an obligation1959 U.S. Tax Ct. LEXIS 109">120 which petitioner owed.On March 15, 1954, officers of petitioner executed, and on March 16, 1954, the appropriate director received, petitioner's corporation income tax return for 1953. Petitioner deducted $ 61,524.98 as net operating losses carried forward from the years 1951 and 1952. The Commissioner made adjustments to the net operating loss deductions to be carried forward to 1953 as have been shown in our preliminary statement.OPINION.The questions before us arise under section 23(a)(1) (A) and (b) of the Internal Revenue Code of 1939. 41959 U.S. Tax Ct. LEXIS 109">121 In its brief petitioner contends that the $ 12,888.27, which has been discussed in our Findings of Fact and which was disallowed as a deduction by the Commissioner in determining petitioner's net operating loss for 1951, should have been allowed as a deduction for additional salaries for services to petitioner. On the other hand, respondent contends that the $ 12,888.27 in question was paid the old stockholders, of whom Stofflet was one, as additional sale price of their stock, which sale took place early in 1951.We do not agree with either version as to what the payment of the $ 12,888.27 was for. The facts in the record do not support either version. From the facts which have been stipulated and a very considerable amount of oral testimony, we have made a finding of fact 32 T.C. 1031">1037 that the $ 12,888.27 in question represented money which the parties had agreed was to be disbursed to the old stockholders by petitioner corporation under the terms of the agreement of January 25, 1951. The amount was clearly not to be paid as additional compensation to Stofflet for any services that he was to render to petitioner. It was on the representation that the $ 12,888.27 was paid as additional1959 U.S. Tax Ct. LEXIS 109">122 executives' salaries to Stofflet that petitioner filed an amended return for 1951 on April 21, 1953, and undertook to take this amount of $ 12,888.27 as additional deduction for executives' salaries. Stofflet testified at the hearing and denied that he had received any such additional compensation. He furnished a list of the old stockholders, including himself, which shows the disbursement made to the old stockholders after the note dated July 24, 1951, was paid, May 23, 1952. It seems plain that the disbursement to the old stockholders was made in accordance with the agreement of January 25, 1951, respecting the three named contracts. It seems to us that it is entirely clear from all the evidence that the $ 12,888.27 in question was not paid by petitioner as additional salary incurred and accrued to Stofflet in 1951. Respondent is sustained in his disallowance of the claimed deduction.Issue (2) is whether petitioner is entitled to an interest deduction in 1952 of $ 648.73 and that petitioner's net operating loss deduction for 1952 allowed by the Commissioner should be increased by that amount. The facts do show that petitioner did incur and pay interest in 1952 of $ 648.731959 U.S. Tax Ct. LEXIS 109">123 in addition to the principal amount of $ 12,888.27 which the corporation (petitioner) was obligated to pay the old stockholders. We think petitioner must be sustained as to this issue.The evidence shows that the note which was executed on behalf of petitioner by its three new stockholders was dated July 24, 1951, and was for the principal sum of $ 13,292.06 and was due 6 months after date, on January 24, 1952. Therefore, it is plain that the note included $ 403.79 interest to cover the period between the date of its execution and the date it was due, January 24, 1952. We hold that this $ 403.79 interest accrued in 1952, the due date of the note. The note was not paid on its due date. In addition to this interest of $ 403.79, included in the body of the note, petitioner paid interest of $ 244.94 to cover the interest on the note from the time it was due, January 24, 1952, to the date it was paid, May 23, 1952. The note was to bear interest from the date it was due, January 24, 1952, at the rate of 6 per cent per annum to the date of payment. As a matter of fact, the interest on the note of $ 13,292.06 from January 24, 1952, to the date it was paid, May 23, 1952, at 6 per cent1959 U.S. Tax Ct. LEXIS 109">124 per annum would be a somewhat larger sum than the $ 244.94 actually paid. However, petitioner makes no point of that fact and only claims a deduction for interest incurred and paid in 1952 of $ 648.73.32 T.C. 1031">1038 From the evidence we hold that petitioner did incur and pay in 1952, $ 648.73 as interest ($ 403.79 plus $ 244.94) on an obligation which it owed and paid in full May 23, 1952, and it is entitled to a deduction of that amount in arriving at its net operating loss for 1952. The Commissioner's disallowance of this deduction of interest for 1952 is not sustained. The Commissioner's argument in his brief in support of his disallowance of this $ 648.73 deduction for 1952 as interest is that the interest, although actually and indisputably paid by petitioner, was paid on behalf of the stockholders and not on an obligation of petitioner. This contention of the Commissioner is contrary to the evidence in the case and we hold against it.Decision will be entered under Rule 50. Footnotes1. Adjustments to IncomeYear 1953Net income reported on return$ 20,707.93 Additional income and unallowable deductions:(a) Net operating loss deduction13,537.00 Net income corrected$ 34,244.93 Explanation of AdjustmentYear 1953(a) Net operating loss deduction is adjustedas follows:Net operating loss 1951 revised --Shown on amended return(31,163.06)Add: Executive salaries12,888.27 Balance(18,274.79)Less: Portion carried back to 19506,523.80 Balance to carry forward(11,750.99)Net operating loss 1952 revised --Shown on return(36,885.72)Add: Interest paid648.73 (36,236.99)Total net operating loss 1953(47,987.98)Net operating loss deduction taken on returnfor 1953(61,524.98)Net adjustment13,537.00The amount of $ 12,888.27 paid to former stockholders of the taxpayer, in accordance with the terms of an agreement of sale of stock between them and the new stockholders, is not deductible as compensation for services in 1951 nor is it (or any part of it) excludible from the taxpayer's gross income for 1951.The deduction of interest in the amount of $ 648.73 in 1952 has been disallowed because it does not represent interest on an obligation of the taxpayer.The net operating loss deduction allowable in 1953 is adjusted herein to reflect the foregoing findings.↩2. Excerpts from agreement of January 25, 1951:2. That the Sellers, each for himself or herself, agree to sell to the Purchasers and the Purchasers agree to buy from the Sellers the said Five Hundred Eighty (580) shares of the common stock of Stofflet and Tillotson together with all dividends incomes and issuances therefrom and all rights of presumption for the price of sum of One Hundred ($ 100.00) Dollars per share plus the amount to be allocated to said shares of stock from the valuation of the inventory as hereinafter set forth.3. That in addition to the payments hereinabove set forth for the consideration of the transfer of the stock, the Purchasers shall pay a sum of money to the stockholders in proportion to their stock interest and in an amount equivalent to their proportionate interest in the inventory owned by the Corporation. Said inventory shall consist of equipment, tools, furniture, supplies, materials, dues, insurances, stationery, etc., being the contents and property of the Corporation on the premises known as 2043 Eastburn Ave., Philadelphia, Penna., or elsewhere. Said sum of money shall not exceed Thirty Thousand ($ 30,000.00) Dollars, but shall be in an amount to be fixed by an appraisal of the said inventory by a representative of the Sellers and a representative of the Purchasers. This appraisal shall be as of the date of settlement as hereinafter fixed. * * 5. It is understood that the sum of Five Thousand ($ 5,000.00) Dollars has been deposited by the Purchasers as down money with the Sellers, said sum to be forfeited to Sellers as liquidated damages in the event that Purchasers refuse to carry out their agreement to purchase. An additional sum of Fifty-Eight Thousand ($ 58,000.00) Dollars, which is the cash balance in the bank account of the Corporation, plus such sum as may be determined upon in the manner described hereinabove for the value of the inventory owned by the Corporation shall be paid at the time of settlement; * ↩3. Agreement of January 25, 1951:8. That the Sellers and Purchasers covenant and agree that, at the time of settlement:(a) the said Corporation will not have any contract for personal services to be rendered, except such as may have been made by the Purchasers or their duly authorized representative.(b) the said Corporation will not have any contract for the purchase or sale of merchandise or of supplies, except the Chester Housing Authority, the National Bank of Germantown and Trust Company, and Harshaw Chemical Company, and except such as may have been made with the consent and authorization of the Purchasers or their duly authorized representative.(c) That any income or expenses involved in the pending contracts referred to in Paragraph 8(b) hereof shall be the property and obligation respectively of the Sellers or their duly authorized representative.↩4. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) Expenses. -- (1) Trade or business expenses. -- (A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * ** * * *(b) Interest. -- All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from the taxes imposed by this chapter.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620842/	Commercial Credit Industrial Corp. (Formerly Auto Fleet Leasing, Inc.), Petitioner v. Commissioner of Internal Revenue, RespondentCommercial Credit Industrial Corp. v. CommissionerDocket No. 393-65United States Tax Court47 T.C. 296; 1966 U.S. Tax Ct. LEXIS 5; December 16, 1966, Filed 1966 U.S. Tax Ct. LEXIS 5">5 Decision will be entered for the respondent. Held, the cost to petitioner in 1961 of $ 260,257.96 for 5,000 shares of capital stock of Commercial Credit Co., which stock petitioner transferred in 1961 to Greyhound Rent-A-Car, Inc., pursuant to a second amendment to an agreement of sale entered into in 1959 between petitioner's assignor (Commercial Credit Corp.) and Greyhound, represented the purchase price of an indivisible intangible asset having an indeterminable useful life not subject to depreciation under sec. 167(a), I.R.C. 1954, and the regulations thereunder. Crane C. Hauser, for the petitioner.Herbert A. Seidman, for the respondent. Arundell, Judge. Arundell47 T.C. 296">297 Respondent determined a deficiency in income tax for the calendar year 1961 in the amount of $ 128,057.39.The issue is whether the cost to petitioner in 1961 of $ 260,257.96 for 5,000 shares of capital stock of Commercial Credit Co., which stock petitioner transferred in 1961 to Greyhound Rent-A-Car, Inc., pursuant to a second amendment to an agreement of sale entered into in 1959 between petitioner's assignor and Greyhound, represented the purchase price of an indivisible intangible asset such as goodwill, going-concern value, 1966 U.S. Tax Ct. LEXIS 5">7 etc., having an indeterminable useful life, not amortizable, or whether the said cost of the stock represented the purchase price of outstanding leases of the motor vehicles purchased from Greyhound in 1959 and amortizable over the life of the leases.FINDINGS OF FACTMost of the facts were stipulated and are incorporated herein by reference.Petitioner is a corporation organized under the laws of the State of Delaware on January 9, 1959. It was initially incorporated under the name Auto Fleet Leasing, Inc., which name was subsequently changed to Commercial Credit Industrial Corp. Its principal office is at 300 St. Paul Place, Baltimore, Md.Petitioner kept its books and made its income tax returns on the accrual method of accounting, and used the calendar year as its taxable year for the taxable periods here involved.Petitioner's income tax returns for 1959, 1960, and 1961 and its amended income tax returns for 1959 and 1960 were filed with the district director of internal revenue at Baltimore, Md. The dates of filing of these returns and the taxable income (losses) shown on the returns are as follows:Taxable incomeYearDate filed(losses)1959Sept. 15, 1960($ 155,571.73)1959 (amended)June14, 1962 (311,138.30)1960June15, 1961 (47,494.72)1960 (amended)June14, 1962 (109,200.73)1961June15, 1962 (20,174.78)1966 U.S. Tax Ct. LEXIS 5">8 Petitioner is engaged in the business of leasing motor vehicles and related equipment. All of petitioner's capital stock, consisting of 20,000 shares of common of $ 100 par value, is owned by Commercial Credit Co., a Delaware corporation, hereinafter referred to as Commercial 47 T.C. 296">298 of Delaware, engaged through its subsidiary corporations in finance, insurance, and manufacturing businesses.In 1958 the management of Commercial of Delaware was informed that Greyhound Rent-A-Car, Inc., a Delaware corporation, hereinafter referred to as Greyhound, desired to sell the assets of its fleet-leasing division which had been losing money.The management of Commercial of Delaware wanted to get into the fleet-leasing business and determined that it would be to its advantage to purchase the already established fleet-leasing division of Greyhound. Accordingly, negotiations were initiated with Greyhound on behalf of Commercial Credit Corp., a Maryland corporation, hereinafter referred to as Commercial of Maryland, all of whose capital stock was owned by Commercial of Delaware. (Note: As will hereinafter be shown, Commercial of Maryland becomes petitioner's assignor.)On January 8, 1959, an1966 U.S. Tax Ct. LEXIS 5">9 agreement of sale was entered into between Greyhound as seller and Commercial of Maryland as purchaser, under which Greyhound agreed to sell to Commercial of Maryland all of the motor vehicles and plant equipment owned by Greyhound on December 31, 1958, which were then under lease to third parties pursuant to "finance leases," full "maintenance leases," "net leases," or "lease sales"; the leases relating to such vehicles and equipment; the accounts receivable and other sums owing on such leases; all vehicles owned on such date which had previously been subject to such leases; all vehicles used by the personnel of Greyhound's leasing division; all 1959 vehicles purchased for leasing purposes and paid for; all insurance policies relating to such vehicles and equipment; and various items of furniture and fixtures, plant equipment, working funds, and materials and supplies to be agreed upon.Under said agreement of sale, Commercial of Maryland agreed to pay a purchase price, divided into three components as follows:(1) As of the "Closing Date," December 31, 1958, Commercial of Maryland agreed to pay Greyhound an amount equal to the sum of the depreciated book value of the purchased1966 U.S. Tax Ct. LEXIS 5">10 vehicles and equipment, the book value of the accounts receivable, the cost of unexpired insurance on the vehicles and equipment, the cost of deferred charges for taxes and licenses, and an agreed amount for furniture, fixtures, and supplies; less the sum of a reserve for bad debts, as determined by Greyhound's independent public accountants, a reserve for refunds under maintenance leases, as determined by Greyhound's independent public accountants, a reserve for losses on the resale of vehicles in the amount of $ 227,000, and all credit balances and advance payments made by customers on leases.(2) At 6-month intervals following the closing date, Commercial of Maryland agreed to review the reserves for bad debts, refunds on 47 T.C. 296">299 maintenance leases, and losses on resale of vehicles; Greyhound agreed to pay to Commercial of Maryland any deficiency from time to time in such reserves; and Commercial of Maryland agreed to pay to Greyhound any excess in such reserves up to the aggregate amount of $ 200,000, and 65 percent of any remaining excess in such reserves.(3) Under section 12 of the said agreement of sale Commercial of Maryland agreed to pay to Greyhound for each of the1966 U.S. Tax Ct. LEXIS 5">11 years 1959 through 1963 a further sum as additional purchase price, computed as follows: 1Said further sum shall be computed by deducting it from the net profit before Federal income taxes, as computed under Section 11, computing the Federal income tax of the Purchaser's Affiliate [petitioner] on the difference, deducting the Federal income tax so determined from the net income before taxes as computed under Section 11, and one-half of the final remainder so determined shall be said further sum to be paid to Seller.Said agreement also provided that two1966 U.S. Tax Ct. LEXIS 5">12 nominees of Greyhound would be elected from time to time as members of petitioner's board of directors until December 31, 1963, and that Greyhound and its affiliates would not engage in the fleet-leasing business for a period of 5 years.On January 31, 1959, Commercial of Maryland assigned all its right, title, and interest in said agreement to petitioner and petitioner assumed all of Commercial of Maryland's liabilities and obligations thereunder.In accordance with section 6 of said agreement of sale, Greyhound submitted to petitioner, on or about February 7, 1959, a statement of assets and liabilities applicable to Greyhound's leasing operation as of December 31, 1958. Because of difficulties encountered in verifying Greyhound's accounts receivable and vehicles and equipment accounts, Greyhound's independent public accountants were unable to certify such statement, as required by section 6 of said agreement of sale.On February 16, 1959, in consideration of petitioner's agreement to waive its right under said agreement of sale to receive said certified statement, the Greyhound Corp., a Delaware corporation which owned all the capital stock of Greyhound, executed a guarantee1966 U.S. Tax Ct. LEXIS 5">13 and indemnity that the losses and loss expenses relating to notes and accounts receivable would not exceed $ 450,000 and that the vehicles shown on the statement furnished by Greyhound to petitioner were under leases to third parties on December 31, 1958.47 T.C. 296">300 On February 16, 1959, Greyhound transferred to petitioner the assets subject to said agreement of sale, and petitioner paid Greyhound the initial payment (exclusive of the further sum to be paid as the third component under sec. 12 of the said agreement of sale) of $ 23,625,242.66 for the assets purchased, as required under said agreement of sale. The following schedule sets forth in detail the assets purchased and the amounts recorded in petitioner's books of account as the initial payment for such assets:NumberVehicles and equipmentAssets purchasedof vehiclesCostDepreciationVehicles and equipment:Full-maintenance lease autos 3,919$ 9,702,911.50$ 2,955,615.36Full-maintenance lease trucks 81280,481.6271,799.13Net lease autos 2,3917,398,651.182,264,232.44Net lease trucks 151417,372.26121,320.92Finance lease autos 2,3106,071,561.211,704,073.61Finance lease trucks 166510,551.04152,948.87Lease-sale autos 3961,268,803.67451,721.09Lease-sale trucks 86197,827.7475,791.29RA (full-maintenance lease) autos 3,1496,736,864.361,898,319.84RA (full-maintenance lease) trucks 2647,613.5114,911.2152 unclassified autos 129,972.4539,356.0312,67532,762,610.549,750,089.79Leased plant equipment 52,252.0012,344.549 company cars 29,274.416,058.3332,844,136.959,768,492.66Reserve for losses on resale of vehicles Accounts and notes receivable:Lease accounts Notes receivable Reserve for losses on collections Prepaid expenses and advances to employees:Delivery expense Taxes and licenses Employee travel advances Furniture, fixtures, and suppliesLiabilities and additional reserves:Advance payments on leases Reserve for maintenance refunds 1966 U.S. Tax Ct. LEXIS 5">14 Otherassets andNet bookAssets purchasedliabilitiesvalueVehicles and equipment:Full-maintenance lease autos $ 6,747,296.14 Full-maintenance lease trucks 208,682.49 Net lease autos 5,134,418.74 Net lease trucks 296,051.34 Finance lease autos 4,367,487.60 Finance lease trucks 357,602.17 Lease-sale autos 817,082.58 Lease-sale trucks 122,036.45 RA (full-maintenance lease) autos 4,838,544.52 RA (full-maintenance lease) trucks 32,702.30 52 unclassified autos 90,616.42 23,012,520.75 Leased plant equipment 39,907.46 9 company cars 23,216.08 23,075,644.29 Reserve for losses on resale of vehicles ($ 227,000.00)(227,000.00)22,848,644.29 Accounts and notes receivable:Lease accounts 1,462,203.58 Notes receivable 3,029.84 1,465,233.42 Reserve for losses on collections (450,000.00)1,015,233.42 Prepaid expenses and advances to employees:Delivery expense 58,161.65 Taxes and licenses 57,727.63 Employee travel advances 2,250.00 118,139.28 Furniture, fixtures, and supplies45,000.00 45,000.00 Liabilities and additional reserves:Advance payments on leases (201,774.33)Reserve for maintenance refunds (200,000.00)(401,774.33)23,625,242.66 1966 U.S. Tax Ct. LEXIS 5">15 In addition to the said initial payment of $ 23,625,242.66, petitioner paid Greyhound on February 16, 1959, in accordance with section 8.1 of the said agreement of sale, a rounded amount called "Advance" of $ 600,000 (rounded from a computed amount of $ 587,782), thus making the total payment on February 16, 1959 (exclusive of any 47 T.C. 296">301 payment for the third component), the amount of $ 24,225,242.66. This rounded amount of $ 600,000 was to reimburse Greyhound for its actual expenses incurred in operating the leasing business for the account of petitioner from the "Closing Date" December 31, 1958, to the "Closing" February 16, 1959.Under the said agreement of sale, the petitioner acquired all of Greyhound's fleet leases. The leases were assigned in bulk to petitioner by Greyhound. When petitioner acquired the leases from Greyhound, it intended and hoped to retain the profitable ones.On March 13, 1959, petitioner and the Greyhound Corp. (parent of Greyhound) entered into an agreement of sale under which petitioner agreed to purchase all the outstanding capital stock of R. A. Auto Leasing Ltd., a Canadian corporation engaged in the fleet-leasing business in Canada, for1966 U.S. Tax Ct. LEXIS 5">16 a price of $ 336,824.23, plus (under sec. 3) additional obligations not material here.Of the 12,736 vehicles, including the 52 unclassified automobiles and the 9 company cars, which Greyhound represented that it owned on December 31, 1958, for which petitioner made the initial payment of their net book value as of that date on February 16, 1959, 12,675 vehicles were on lease to lessees of Greyhound under four basic types of lease arrangements:(a) 7,068 automobiles and 107 trucks, having an aggregate net book value of $ 11,827,225.45, were on full-maintenance leases, which in general provided for the payment by the lessee of a stipulated monthly rental for a stipulated number of months, with the lessor being obligated to bear all normal maintenance expenses. Upon the termination of such leases, the leased vehicles were to be returned to the lessor, and the lessor would realize the profit or sustain the loss on the disposition of the vehicles. Some of the full-maintenance leases provided for refunds to the lessees in the event the mileage did not exceed a certain amount, or in the event the maintenance costs did not exceed certain amounts.(b) 2,391 automobiles and 151 trucks, 1966 U.S. Tax Ct. LEXIS 5">17 having an aggregate net book value of $ 5,430,470.08, were on net leases, which were similar in all respects to the full-maintenance leases except that the lessee was responsible for all maintenance expenses.(c) 2,310 automobiles and 166 trucks, having an aggregate net book value of $ 4,725,089.77, were on finance leases, which in general provided for the payment by the lessee monthly of a percentage of the capitalized cost of the vehicles, which percentage was based on the monthly depreciation rate of the vehicles, plus a percentage to compensate the lessor. A markup of from $ 100 to $ 250 per vehicle was ordinarily included in the capitalized cost of each vehicle. Upon the termination of a finance lease with respect to a vehicle, the vehicle 47 T.C. 296">302 was returned to the lessor and disposed of. Any excess of the proceeds of disposition over the depreciated capitalized cost of the vehicle was remitted to the lessee, and if the depreciated capitalized cost exceeded the proceeds of disposition, the lessee was billed for the difference. In general, the minimum lease term for a vehicle under a finance lease was 1 year. The lessee was responsible for all maintenance expenses. 1966 U.S. Tax Ct. LEXIS 5">18 (d) 396 automobiles and 86 trucks, having an aggregate net book value of $ 939,119.03, were on lease-sales, which provided for the payment by the lessee of a stipulated monthly rental for a stipulated term of months, the lessee being obligated to pay all maintenance expenses. At the end of the lease term, the lessee had an option to acquire the vehicle for $ 1, plus any taxes the lessor was required to pay on account of such sale.After the closing of the agreement of sale on February 16, 1959, petitioner sent a manager and a staff to Cleveland, Ohio, to take charge of the Greyhound fleet-leasing business. At that time Greyhound had approximately 110 employees engaged in the operation who were initially employed by petitioner. In the summer of 1959 the business was moved to Baltimore, Md. By that time approximately 20 of the former Greyhound employees remained in the employment of petitioner.A disagreement subsequently arose between Greyhound and petitioner with respect to the method of computation of the second and third components of the purchase price for the assets under sections 4, 11, and 12 of said agreement of sale.In order to resolve this controversy, on May 9, 1960, an1966 U.S. Tax Ct. LEXIS 5">19 amendment to said agreement of sale was executed by Greyhound, Commercial of Maryland, and petitioner. Regarding the disagreement with respect to the second component of the purchase price, the said amendment provided that petitioner would pay Greyhound the sum of $ 200,137.05 21966 U.S. Tax Ct. LEXIS 5">20 as a depreciation differential on certain vehicles that were returned to petitioner by the lessees. With regard to the third component of the purchase price, the said amendment provided that the net profits of petitioner to which Greyhound was entitled under section 12 of said agreement of sale would be paid as a single sum rather than annually, and that the period for which such net profits would be computed would be 1959 through 1965 rather than 1959 through 1963. 347 T.C. 296">303 On November 22, 1961, Greyhound, Commercial of Maryland, and petitioner executed a second amendment to the agreement of sale dated January 8, 1959, under which petitioner agreed, in settlement of its obligation to pay the third component of the purchase price provided for in section 12 of said agreement of sale, to deliver to Greyhound 5,000 shares of common stock of Commercial of Delaware; and Greyhound agreed to deliver to petitioner the resignation of its two nominees on petitioner's board of directors. 4 Petitioner purchased 5,000 shares of stock of Commercial of Delaware at a total cost of $ 260,257.96, and transferred them to Greyhound.1966 U.S. Tax Ct. LEXIS 5">21 Also, on the same date, November 22, 1961, the Greyhound Corp. (parent of Greyhound), petitioner, and Commercial of Maryland entered into an agreement whereby, "In consideration of the execution of the foregoing agreement" (the agreement between Greyhound, Commercial of Maryland, and petitioner, dated Nov. 22, 1961) --The Greyhound Corporation, a Delaware corporation with its executive offices at Chicago, Illinois, hereby(i) consents to the execution of the foregoing agreement and agrees that the same in no way shall modify or affect any of its obligations as guarantor to Commercial Credit Corporation (Purchaser) or to Auto Fleet Leasing, Inc. (Purchaser's Affiliate), and(ii) unconditionally releases and discharges said Auto Fleet Leasing, Inc., from any and all obligations presently existing under or by virtue of Section 3 of the Agreement of Sale dated the 13th day of March, 1959, between Auto Fleet Leasing, Inc., and Undersigned, covering the sale by the latter to the former of all of the issued and outstanding shares of the capital stock of R. A. Auto Leasing Limited, a Canadian corporation with its executive offices at Toronto, Canada, and agrees that said Section 1966 U.S. Tax Ct. LEXIS 5">22 * of said Agreement of Sale hereby are made void and of no effect, and deleted.Petitioner prorated the payment of $ 260,257.96 on the basis of the percentages developed for the allocation of the prior payment of $ 200,137.05 made to Greyhound, and amortized the payment on its 47 T.C. 296">304 books and records and claimed deductions in its Federal income tax returns as follows:YearAmount1959$ 118,520.961960104,108.38196136,084.7719621,543.85260,257.96Respondent disallowed the amortization deductions claimed with respect to such payment of $ 260,257.96 for the years 1959, 1960, and 1961 in the amounts of $ 118,520.96, $ 104,108.38, and $ 36,084.77, respectively. This resulted in the reduction of petitioner's net operating loss carryover from 1959 and 1960 to 1961 of $ 420,339.03 to $ 197,709.69, and the reduction of petitioner's amortization deduction for 1961 in the amount of $ 36,084.77.No part of said payment of $ 260,257.96 was allocable to Greyhound's covenant not to compete under said agreement of January 8, 1959.There were 3,330 lessees of the 12,675 leased vehicles purchased from Greyhound as of January 1, 1959. On January 1, 1963, 741966 U.S. Tax Ct. LEXIS 5">23 of these lessees were lessees of petitioner, leasing 4,671 vehicles. In the intervening period petitioner acquired 232 new lessees, leasing 5,764 vehicles.ULTIMATE FINDINGThe sum of $ 260,257.96 represented the purchase price of an indivisible intangible asset having an indeterminable useful life.OPINIONPetitioner contends that the payment in 1961 of $ 260,257.96 for the 5,000 shares of capital stock of Commercial of Delaware represents the purchase price of the outstanding leases of the motor vehicles purchased from Greyhound in 1959; that such purchase price represents the excess value of the leases over the fair market value of the leased vehicles; and that such purchase price is amortizable over the life of the leases under section 167(a)(1), I.R.C. 1954, 5 and section 1.167(a)-3 of the Income Tax Regulations.6 In other words, petitioner 47 T.C. 296">305 apparently concedes that in payment of the third component of the purchase price of "the assets covered by said Agreement of Sale" (quoted matter from second amendment dated Nov. 22, 1961) it acquired an "intangible asset" but contends that it was such an intangible1966 U.S. Tax Ct. LEXIS 5">24 asset which is the subject of a depreciation allowance.1966 U.S. Tax Ct. LEXIS 5">25 On the other hand, the respondent, in his brief, asserts:Petitioner amortized the $ 260,257.96 payment on its books, and for the years 1959 to 1962, inclusive, claimed deductions of $ 118,520.96, $ 104,108.38, $ 36,084.77, and $ 1,543.85, respectively. The respondent has disallowed the deductions claimed on the grounds (1) that the $ 260,257.96 represented an amount paid for "goodwill" or "going concern value", or (2) that the $ 260,257.96 represented the value of fleet leases acquired from Greyhound which fleet leases had an indeterminate useful life, or (3) that the $ 260,257.96 represented, in part, additional purchase price of R. A. Auto Leasing, Ltd. stock.Each of the three grounds relied upon by respondent represents a different alternative. However, in his brief respondent states that "to some degree" grounds 1 and 2 overlap. It would seem that this is true.Under these opposing contentions we must determine what intangible asset petitioner acquired by the payment of the third component of the purchase price and whether the cost of such intangible asset is the subject of a depreciation allowance.In the fall of 1958 Commercial of Delaware wanted to get into the fleet-leasing1966 U.S. Tax Ct. LEXIS 5">26 business. Its management was informed that Greyhound desired to sell the assets of its fleet-leasing division which had been losing money. Commercial of Delaware thought it would be more to its advantage to acquire a going business, with existing lessees, than to buy a fleet of new automobiles and start from "scratch" in acquiring new lessee customers. Accordingly, after initial negotiations, an agreement of sale was entered into on January 8, 1959, between Greyhound, as seller, and Commercial of Maryland, as purchaser, the details of which are set out in our findings. On the next day, January 9, 1959, petitioner was incorporated to engage in the fleet-leasing business, and on January 31, 1959, Commercial of Maryland assigned all of its rights in the agreement with Greyhound to petitioner. The "Closing" of the agreement occurred on February 16, 1959, when petitioner paid Greyhound $ 24,225,242.66 for the first two components of the purchase price. The third component of the purchase price was provided for in section 12 of the agreement of sale (see fn. 1) and was to be paid over the years 1959 through 1963, if there were profits in those years. Under the agreement of sale, petitioner1966 U.S. Tax Ct. LEXIS 5">27 was able to commence 47 T.C. 296">306 the fleet-leasing business immediately with 3,330 existing lessees of 12,675 leased vehicles.After two amendments to the said agreement of sale of January 8, 1959, made on May 9, 1960, and November 22, 1961, respectively, petitioner, under the second amendment, agreed to pay Greyhound in 1961, as full payment of component 3 of the purchase price, 5,000 shares of common stock of Commercial of Delaware, which stock cost petitioner $ 260,257.96.At no place in the original contract of January 8, 1959, nor in the two amendments thereto, is it provided that the third component of the purchase price of the assets of the fleet-leasing division of Greyhound is for the leases alone. Section 12 of the original contract provided that "Purchaser will pay Seller or its nominee, annually, for the years 1959 to 1963, both inclusive, a further sum as additional purchase price." (Emphasis supplied.) The first amendment changed section 12 to read in part: "Purchaser will pay Seller or its nominee a further sum as additional purchase price determined by the operating profit, if any, of Purchaser's Affiliate during the period from January 1, 1959 to1966 U.S. Tax Ct. LEXIS 5">28 December 31, 1965. * * Payment of said additional purchase price shall be made * * * not later than April 30, 1966." (Emphasis supplied.) The second amendment provided in part that section 12 "is made void and of no effect, and deleted. [and] * * * Prior to December 1, 1961, (i) Purchaser's Affiliate will cause to be registered in the name of and delivered to Seller, as additional purchase price for the assets covered by said Agreement of Sale" the said 5,000 shares of Commercial of Delaware. [Emphasis supplied.]It would seem when petitioner acquired the automobiles from Greyhound that it must have taken them subject to the lease agreements and, while the leases may be regarded as separate property by the lessees, they were simply contracts to pay an agreed rental insofar as petitioner was concerned. One of the terms of the contract of purchase was that petitioner should not only pay as its cost the depreciated book value of the automobiles but should in some way reimburse Greyhound for its cost of securing the leases. 7 This cost was not 47 T.C. 296">307 carried on Greyhound's books but the amount to be paid was resolved, in the first instance, by giving Greyhound1966 U.S. Tax Ct. LEXIS 5">29 a portion of the profits that would be earned, and this was later modified so as to give Greyhound 5,000 shares of capital stock of Commercial of Delaware which petitioner in fact acquired at a cost of $ 260,257.96. This was a lump sum and there was no apportionment of it among the several automobiles or groups of automobiles acquired by petitioner so as to determine in what manner any depreciation should or could be allowed.1966 U.S. Tax Ct. LEXIS 5">30 We have found as an ultimate fact that this lump sum represented the purchase price of an indivisible intangible asset having an indeterminable useful life. As such, the respondent contends it is not subject to depreciation under such cases as The Danville Press, Inc., 1 B.T.A. 1171">1 B.T.A. 1171; U.S. Industrial Alcohol Co., 42 B.T.A. 1323">42 B.T.A. 1323 (issue I), affirmed as to issue I, but affirmed and reversed and remanded as to other issues, 137 F.2d 511 (C.A. 2, 1943); Thrifticheck Service Corp., 33 T.C. 1038">33 T.C. 1038, affd. 287 F.2d 1 (C.A. 2, 1961), Richard M. Boe, 35 T.C. 720">35 T.C. 720, affd. 307 F.2d 339 (C.A. 9, 1962); and Westinghouse Broadcasting Co., 36 T.C. 912">36 T.C. 912 (issue 2), affirmed as to issue 1 only, 309 F.2d 279 (C.A. 3, 1962).What has come to be known as the "indivisible asset rule" had its beginning in the last sentence of the opinion in 1 B.T.A. 1171">The Danville Press, Inc., supra. In that case the taxpayer began business on November 1, 1919, when it purchased all the assets of a predecessor newspaper-publishing company for $ 160,000 cash. Among the assets acquired1966 U.S. Tax Ct. LEXIS 5">31 were 9,000 subscriptions which expired from 1 to 12 months. It was agreed between the seller and the purchaser that of the total purchase price $ 36,000 should be allocated to the 9,000 subscriptions and $ 20,000 to goodwill. The taxpayer claimed the right to deduct in 1920 depreciation in the sum of $ 30,000, representing ten-twelfths of the $ 36,000. In denying the taxpayer's claim, we said:This necessarily involves the proposition that at the end of such period the subscription list purchased by it had no value. We can not agree that this is so, nor can we agree that what the taxpayer purchased was 9,000 contracts expiring within 12 months. It purchased an asset which was a subscription list subject to fluctuations from time to time. [Emphasis supplied.]The situation in Danville is much the same as the situation here. In Danville the taxpayer acquired 9,000 subscriptions which expired in 47 T.C. 296">308 from 1 to 12 months. At the expiration date some subscribers would renew and some would not. In the instant case petitioner, through its assignor, acquired 3,330 lessees. At the expiration date some of the lessees would and did renew their leases. The taxpayer1966 U.S. Tax Ct. LEXIS 5">32 in both cases acquired a going business with existing subscribers and existing lessees, and did not have to start from the beginning as a new business would have to do. Petitioner already had lessees and hoped to continue dealing with the profitable ones, which it in fact did. In this connection, Grimes, on cross-examination, testified as follows:Q. Now the leases that you acquired from Greyhound in effect gave you a list of companies that were interested in the type of service that you intended to use in the future, is that correct?A. Yes, sir.Q. And you did in effect get renewals of leases, of companies that you had acquired from Greyhound?A. Well, I think the word renewal was in order, yes.Q. In fact, isn't it true that some of the customers or leases originally obtained from Greyhound are still using the service that is offered by the Commercial Credit?A. Yes, that is true. By Commercial Credit Industrial.Q. Industrial Corporation, that's right. Now when you acquired the leases originally did you expect to retain or at least hope to retain a large percentage of the customers of Greyhound?A. I will have to put a modification on that -- only where they were profitable1966 U.S. Tax Ct. LEXIS 5">33 yes. The profitable ones we intended to retain, right.Q. Now by acquiring the going or operating business of Greyhound, Commercial Credit Industrial Corporation was able to commence the fleet leasing business immediately, is that correct?A. Yes.In 42 B.T.A. 1323">U.S. Industrial Alcohol Co., supra, the taxpayer acquired a going business which included approximately 200 sales contracts for the delivery of alcohol over the succeeding year and sought to amortize the cost of the contracts, which we denied and were affirmed. In 33 T.C. 1038">Thrifticheck Service Corp., supra, the taxpayer acquired a going check-servicing business which included 200 customer servicing contracts which it sought to amortize and which we denied and were affirmed. In 36 T.C. 912">Westinghouse Broadcasting Co., supra (issue 2), the taxpayer purchased an operating television station which included 183 spot advertising contracts that would expire within 1 year and sought to amortize the cost of such contracts. In holding against the taxpayer, we said:These contracts were not purchased as individual contracts. In fact, the letter purchase agreement did not specify the price for each contract1966 U.S. Tax Ct. LEXIS 5">34 nor even the total basis assigned to them. Petitioner purchased a mass asset whose value will fluctuate as contracts expire and as new contracts are signed. When confronted with this issue, this Court has consistently held such a mass asset not depreciable because it did not have a determinable useful life * * 47 T.C. 296">309 In support of this holding, among the cases we cited were The Danville Press, Inc.; U.S. Industrial Alcohol Co.; Thrifticheck Service Corp.; and Richard M. Boe, all supra.In its brief petitioner cites Seaboard Finance Co., T.C. Memo. 1964-253, as persuasive support for its position. That case has since been affirmed by the Ninth Circuit. See Commissioner v. Seaboard Finance Co., 376 F.2d 646 (C.A. 9, 1966). In that case the taxpayer purchased approximately 55 small loan businesses at a premium. The question presented was whether the premiums were paid for the loan accounts or for goodwill. The Commissioner determined that the entire premiums were paid for goodwill or other elements of value which were not depreciable under the indivisible asset rule. We held, applying the principle of 1966 U.S. Tax Ct. LEXIS 5">35 Cohan v. Commissioner, 39 F.2d 540 (C.A. 2, 1930), that 30 percent of the premiums paid was allocable to goodwill, since certain factors indicated that some part of the cost of the premiums was paid for going-concern value; and that 70 percent of the premiums paid was for the loan contracts and was subject to amortization. In affirming our holding that the indivisible asset rule was not applicable to 70 percent of the premiums, the Ninth Circuit said:In this case, Seaboard apparently made an honest attempt to value the premium paid, under the impression that a depreciation deduction would be allowed. Each contract was individually analyzed to determine its ultimate worth. Although part of the premium was correctly held by the Tax Court to be good will, it does not appear that the remaining portion of the premium should be declared non-depreciable on the basis of the "indivisible asset" rule.One of the reasons given by the Tax Court for rejecting this alternative argument, was that the "indivisible asset" rule is inapplicable where the purchase price was derived by appraising the value of each individual asset. The Tax Court cited 1966 U.S. Tax Ct. LEXIS 5">36 Boe v. Commissioner, 9 Cir., 307 F.2d 339 [10 AFTR 2d 5458], for this proposition.In Boe, the taxpayer was unable to value each of the individual medical contracts which were there purchased, and as a result no part of the total purchase price was assigned to any contract or group of contracts. There was simply bargaining between the parties as to what would be paid for the business as a whole. Under these circumstances the Tax Court, and this court, applied the "indivisible asset" rule, and therefore held that it was not shown that the capital asset involved -- the contract medical business -- diminished in value each time there was termination of a particular contract. See Boe, supra, at 343.In the instant case, there was no attempt made at any time to place a value on each of the leases. The record shows that petitioner merely acquired all the leases in a bulk transaction and that the agreement of sale and the amendments thereto did not specify the price for each lease or even the total price assigned to them. Furthermore, no evidence was presented to show that petitioner attempted to value each 47 T.C. 296">310 lease, or that it inspected each lease1966 U.S. Tax Ct. LEXIS 5">37 prior to its acquisition. There is present here no basis for the application of the Cohan rule.We hold for the respondent on the basis of our ultimate finding and the cases above cited. Cf. Commissioner v. Indiana Broadcasting Corp., 350 F.2d 580 (C.A. 7, 1965), reversing 41 T.C. 793">41 T.C. 793. It thus becomes unnecessary for us to consider the respondent's third ground for the disallowance of the deductions claimed, namely, "that the $ 260,257.96 represented, in part, additional purchase price of R. A. Auto Leasing, Ltd. stock."Decision will be entered for the respondent. Footnotes1. As provided under sec. 12 of the said agreement of sale, component (3) is somewhat involved. After two amendments to the said agreement of sale, as hereinafter mentioned, it was agreed that petitioner would pay Greyhound in 1961 as component (3) of the purchase price 5,000 shares of common stock of Commercial of Delaware, which stock cost petitioner $ 260,257.96. The cost of this stock is what presents the "issue" with which we are concerned.↩2. This payment of $ 200,137.05 is material to the present issue only in that petitioner amortized this amount over the life of the particular leases in a somewhat complicated computation; claimed and was allowed the amortized amounts as deductions from income; and then later amortized the amount here in dispute ($ 260,257.96) in the same manner as it did concerning the $ 200,137.05.↩3. This amendment regarding the third component of the purchase price becomes immaterial to the present issue by reason of the second amendment↩ to the said agreement of sale, hereinafter mentioned, entered into on Nov. 22, 1961.4. The exact words of the second amendment were, in part, as follows:"1. Effective as of the date hereof, said Agreement of Sale, as heretofore amended, hereby is amended further, as follows:* * * "1(c). Seller [Greyhound] hereby unconditionally releases and discharges Purchaser [Commercial of Maryland] and Purchaser's Affiliate [petitioner] from any and all obligations presently existing under or by virtue of Section 12, and said Section hereby is made void and of no effect, and deleted. * "2. Prior to December 1, 1961, (i) Purchaser's Affiliate will cause to be registered in the name of and delivered to Seller, as additional purchase price for the assets covered by said Agreement of Sale, five thousand (5,000) shares of Common Stock of Commercial Credit Company, a Delaware corporation, of the par value of $ 5. per share, and (ii) Seller will deliver to Purchaser's Affiliate the resignations from Purchaser's Affiliate's Board of Directors of the two nominees thereon of Seller."3. Except as amended by said agreement dated the 9th day of May, 1960, and by this Second Amendment, said Agreement of Sale shall remain in full force and effect, in accordance with its original terms."[Emphasis supplied.]↩5. SEC. 167. DEPRECIATION.(a) General Rule. -- There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence) -- (1) of property used in the trade or business, * ↩6. Sec. 1.167(a)-3 Intangibles.If an intangible asset is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy, such an intangible asset may be the subject of a depreciation allowance. Examples are patents and copyrights. An intangible asset, the useful life of which is not limited, is not subject to the allowance for depreciation. No allowance will be permitted merely because, in the unsupported opinion of the taxpayer, the intangible asset has a limited useful life. No deduction for depreciation is allowable with respect to goodwill. * *↩7. At the hearing, petitioner offered the testimony of Edmund L. Grimes, who was chairman of the boards of Commercial of Maryland and Commercial of Delaware. Grimes testified that, acting for Commercial of Maryland, he and one Ackerman, acting for Greyhound, negotiated the transaction here in question. Ackerman was president of Greyhound. When asked to explain the third component of the purchase price, Grimes, in his testimony, said:"Now this is the part that may confuse you. He [Ackerman] said 'I spent a lot of money acquiring those leases, either by paying commissions to men or in my sales organization. You are going to get the income from those leases. I believe I should be reimbursed for some of the expenses that I spent to get that income.' And I [Grimes] said 'but you can't prove it in any way because the books are in very bad shape.' He said 'I agree, but I still think I am entitled to some.'"So in the negotiations it worked out that we in effect said well, if there is any income left we will participate and repay that to you in the form of an amount equal to a percentage of the profits."I thought I had made a reasonably good deal because if we didn't have the income, which would be taxable income, we wouldn't have the expense."So that was the premises upon which this negotiation was made, of paying a percentage of the profits."↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620844/	Arthur S. and Josephine G. Kennedy v. Commissioner. Arthur S. & Josephine G. Kennedy v. CommissionerDocket No. 14399.United States Tax Court1948 Tax Ct. Memo LEXIS 98; 7 T.C.M. 632; T.C.M. (RIA) 48172; August 31, 19481948 Tax Ct. Memo LEXIS 98">98 Preston D. Orem, Esq., for the petitioners. H. Arlo Melville, Esq., for the respondent. LEMIRE Memorandum Findings of Fact and Opinion The respondent has determined income tax deficiencies for 1943 and 1944 in the respective amounts of $441.27 and $563.76, plus a 5 per cent negligence penalty for each of such years. A motion by the respondent, filed after the hearing, to amend the pleadings to conform with the proof and to assert a 50 per cent fraud penalty in each of the taxable years was denied August 3, 1948. Findings of Fact The petitioners during the taxable years involved were residents of California and were living together as husband and wife. They filed joint returns for each of the years with the collector at Los Angeles. They have since been divorced. On their returns for the taxable years the petitioners reported joint income from their employment as welders in the amounts of $5,384.26 for 1943 and $5,523.47 for 1944. They claimed deductions in their returns for each of the years as follows: ITEMS19431944ContributionsCatholic Church$ 52.00$104.00Red Cross30.0030.00Salvation Army30.0030.00China Relief5.005.00U.S.O.25.0030.00Tuberculosis Society2.002.00 lD.A.V.5.003.00Community Chest5.005.00March of Dimes3.005.00P.T.A.5.006.00Elks and Eagles20.00Elks Lodge20.00American Legion1.00Veterans of Foreign Wars2.502.00Rescue Mission1.002.00War Chest17.0024.00Soldiers and Sailors Relief2.502.00Army and Navy Relief2.502.00St. Vincent De Paul forItalian Relief200.00Examiner's Xmas Fund forWar Wounded10.00Total Contributions$207.50$483.00InterestMortgage on Home75.0073.80Car Contract (Seaboard Fi-nance)35.00Car Contract (Bank ofAmerica)40.00Furniture (Seaboard Fi-nance)40.0033.90Personal Loan (Bank ofAmerica)Total Interest$150.00$147.70TaxesReal Estate35.7536.90Personal Property3.253.25Licenses12.80Licenses (3 cars)43.20Telephone1.00Train Fare16.00Amusement30.00Federal Use10.0015.00Sales Tax65.00Sales Tax (Extra Pur-chases)100.00City Tax3.50City License2.00Total Taxes$177.30$200.35LossesClothing burned at work100.00120.00Roof blown off by wind18.00Ran into a bank in Ocean-side going at 15 mi. pr.hr. because of slipperypavement25.00Small tools stolen at work20.00Total Losses$118.00$165.00Deductible ExpensesProtective Clothing: Helmet25.0012.50Leather Suits79.0030.00Special Work Shoes80.0050.00Repairing Work Shoes20.0012.00Gloves40.0036.00Goggles40.007.00Rubber Hat2.00Rubber Coat8.00Laundry of WorkingClothes (Only)156.00156.00Kit of Tools - Value $150(Depreciation 3 yrs.)58.00Kit of Tools - Value $175(Depreciation 3 yrs.)58.00Tools - Yearly Depreciation15.0010.001938 Olds. - Value $400,used for work (Depre-ciation)200.001944 LaSalle - Value $1,000,used for work (Deprecia-tion)200.00Gasoline220.00200.00Oil18.0018.00Repairs80.0060.00Auto Insurance34.00Accident Insurance60.00Union Dues168.00125.00Unemployment Insurance49.84Total Deductible Ex-penses$1,269.00$1,058.34MedicalDr. R. W. Shaeffer - $250;Anes. - $20 - Redondo270.00Torrance Hospital - $100;Gratuity - $10110.00Prescriptions, Medicine,and Vitamins60.00Total Medical$440.001948 Tax Ct. Memo LEXIS 98">99 The returns for both years were prepared for the petitioners by Edward W. Jackson, described as a Notary Public, who called at their home with a printed questionnaire which he helped them to fill out. This questionnaire contained space for listing income and vaious types of deductions, under the headings, Contributions, Interest, Taxes, Bad Debts, and others. Under Contributions, for example, were the following items, as filled out by the petitioners for 1943: CONTRIBUTIONSCatholic Church$52.00China Relief5.00Tuberculosis Society2.00Orthopedic HospitalMarch of Dimes3.00Birth ControlMilk FundsPolitical OrganizationSoldiers and Sailors Relief2.50Red Cross30.00Greek ReliefD.A.V.5.00D.A.R.P.T.A.5.00American LegionResearchRescue Mission1.00Army and Navy2.50Salvation Army30.00U.S.O.25.00Community Chest5.00Goodwill Society10.00Boy ScoutsFrat. Org.20.00Vets. Foreign Wars2.50Cruelty to AnimalsWar Chest17.00MiscellaneousElksThe petitioners' returns were made up by Jackson from these questionnaires. He signed the returns, along with the petitioners, as the person preparing them. 1948 Tax Ct. Memo LEXIS 98">100 In his audit of the returns the respondent disallowed all of the deductions claimed for both years. The petitioners alleged in the original petition filed in this proceeding that the respondent erred in disallowing "each and every item" claimed in the return and further alleged, as facts, that "our returns were honestly made. We will prove that we are one of a group of taxpayers who are being persecuted without cause." On motion of the respondent to dismiss the proceeding for failure of the petitioners to comply with the Court's Rules of Practice (Rule 6(d), 6(e), and 6(i), the petitioners filed an amended petition which provides in paragraphs 4 and 5 as follows: "4. The determination of tax set forth in the said notice of deficiency is based upon the following errors: Internal Revenue Department's disallowance of 1. contributions, 2. interest, 3. taxes, 4. losses, 5. miscellaneous expenses, 6. business expenses, 7. medical expenses, in the amounts of 1. contributions 955.50, 2. interest 431.49, 3. taxes 485.70, 4. losses 433.00, 5. medical expense 524.03 and 6. miscellaneous expense 2968.73. "5. The facts upon which the petitioner relies as the basis of this proceeding are1948 Tax Ct. Memo LEXIS 98">101 as follows: with 1. receipts, 2. affidavits and 3. witnesses I/we will prove that our returns were correctly and honestly made, and that we are one of a group of segregated taxpayers who are being persecuted for a purpose foreign to our tax returns; that the Department's notice of deficiency is in the hands of the Tax Court or is attached hereto. We further rely upon the fact that we did make the 1. contributions amounting to 955.50, 2. paid interest 431.49, 3. paid taxes 485.70, 4. suffered losses 433.00, 5. had net medical expense 2968.73 and our 1945 overassessment should have been 338.50 instead of 21.93. " Both the original and amended petitions were prepared on printed forms furnished by Jackson and signed by him as Notary Public. The respondent's motion to dismiss was denied November 19, 1947. Opinion LEMIRE, Judge: By disallowing the deduction of all the items claimed by the petitioners in their returns the respondent put the petitioners on their proof of the facts essential to the allowance of the deductions. The only evidence furnished, or offered, by the petitioners is the oral testimony of petitioner, Arthur S. Kennedy. This testimony consists of uncorroborated1948 Tax Ct. Memo LEXIS 98">102 statements by the witness that the disputed expenditures or contributions were actually made, or the losses sustained, as claimed in the returns. These statements, for the most part, were elicited by counsel in an item by item interrogation, based on the returns themselves. The witness admitted that he had no independent recollection of many of the items claimed in the returns. He had no receipts or authenticating records of any description. He claimed that the receipts which he once had were last seen in the possession of his wife. He did not know her present whereabouts. He had made no effort to secure duplicate receipts or any other written matter verifying his alleged charitable contributions, or other items claimed in the returns. He admitted that most of these items were nothing more than estimates. In the circumstances of this case the type of evidence furnished by the petitioners is of little, if any, value. Certainly, it does not meet the burden of proof resting upon the petitioners to establish their legal rights to the deductions claimed. The evidence as a whole not only leaves considerable doubt as to the factual basis for many of the deductions claimed but it convinces1948 Tax Ct. Memo LEXIS 98">103 us that the petitioners themselves gave but little serious attention to the preparation of their returns. Notwithstanding the unsatisfactory state of the petitioners' proof, we are convinced that they are entitled to some of the deductions which the respondent has disallowed. We are satisfied, for instance, that in their trade as welders the petitioners were required to provide themselves with certain articles of protective clothing, such as, leather suits, helmets, and gloves; that they were required to pay certain taxes, such as, sales tax and automobile license; and that they made some contributions to recognized charities. The respondent concedes on brief that the petitioners are entitled to a portion of some of the items claimed in their returns. From such means as the evidence affords us we have concluded that the aggregate of the deductions of all classes to which the petitioners are entitled in each of the taxable years is not in excess of $750. We think that the respondent has correctly imposed the 5 per cent negligence penalty. Decision will be entered under Rule 50. Footnotes*. Opinion is vacated pursuant to Tax Court order dated September 30, 1948.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620845/	R. L. GOODMON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentGoodmon v. CommissionerDocket No. 22798-86.United States Tax CourtT.C. Memo 1988-44; 1988 Tax Ct. Memo LEXIS 50; 55 T.C.M. 65; T.C.M. (RIA) 88044; February 10, 1988. R. L. Goodmon, pro se. J. Scot Simpson, for the respondent. SWIFTMEMORANDUM OPINION SWIFT, Judge: This matter is before the Court on respondent's motion to dismiss for lack of prosecution. Respondent determined deficiencies in petitioner R. L. Goodmon's Federal income tax and additions to tax for the years and in the amounts set forth below: Additions to Tax, I.R.C. Secs. 1YearDeficiency6653(b)6653(b)(1)665466611980$ 6,566.03$ 3,283.02$ -- $ 416.92$ -- 19816,143.993,071.50$ -- 471.67-- 19827,830.00-- 3,915.00650.55783.0019837,997.00-- 3,998.50486.06799.70Respondent also1988 Tax Ct. Memo LEXIS 50">52 determined additions to tax for 1982 and 1983 under section 6653(b)(2). In addition, respondent now argues that petitioner's lawsuit is frivolous and that damages should be awarded to the United States against petitioner under section 6673. At the time petitioner filed his petition in this case, he resided in Lakeland, Florida. On November 23, 1987, petitioner submitted to the Court documents indicating, among other things, that his wages did not constitute taxable income and that he no longer would pursue this lawsuit because of his status as a "nontaxpayer." This case was called for trial at Tampa, Florida, on January 11, 1988, but neither petitioner nor anyone on his behalf appeared at the trial. With regard to the tax deficiencies and additions to tax under sections 6654 and 6661, petitioner has the burden of proof. Rule 142(a); . In light of petitioner's failure to appear at the trial and to participate in any meaningful way in the resolution of this case, respondent's motion to dismiss is granted as to the tax deficiencies and the additions to tax under sections 6654 and 6661.2,1988 Tax Ct. Memo LEXIS 50">53 affd. ; Rule 149(b). 1988 Tax Ct. Memo LEXIS 50">54 With regard to the additions to tax for fraud under section 6653(b), respondent has the burden of proof. Sec. 7454(a); Rule 142(b); . Respondent submits that his request for admissions served upon petitioner combined with petitioner's failure to respond thereto establish the facts necessary to satisfy respondent's burden of proof with respect to the additions to tax under section 6653(b). See Rule 90(c). We agree. The relevant facts established by respondent's request for admissions are as follows: In 1980, 1981, 1982, and 1983, petitioner was employed by Seaboard Coastline Railroad Co. (Seaboard Coastline) and received wages in the respective amounts of $ 24,291.47, $ 23,567.75, $ 28,669.23, and $ 30,959.15. Petitioner timely received Forms W-2 from Seaboard Coastline reflecting the wages he earned in each of those years. Petitioner filed no Federal income tax returns for 1980, 1981, 1982, and 1983. On July 31, 1979, petitioner filed with Seaboard Coastline a Form W-4 on which he claimed 26 withholding allowances. In respondent's examination of petitioner's Federal income tax liabilities, petitioner did not cooperate1988 Tax Ct. Memo LEXIS 50">55 with respondent's representatives, and petitioner asserted frivolous "tax-protestor" arguments to impede respondent's examination. The above factors demonstrate petitioner's willful intent to evade the payment of Federal income taxes for 1980, 1981, 1982, and 1983. . Respondent has satisfied his burden of proof with respect to the additions to tax under section 6653(b) for each of the years in issue, and petitioner's failure to submit any contrary evidence with regard thereto provides the basis for granting respondent's motion to dismiss as to these additions to tax. Respondent's motion to dismiss therefore will be granted as to all determinations set forth in respondent's notice of deficiency. With regard to respondent's motion for damages under section 6673, we note petitioner's failure to appear at the trial and the frivolous arguments he continues to make. We also note the prior litigation in this Court and in the Eleventh Circuit by petitioner concerning his Federal income tax liability for 1979. Goodman v. Commissioner, an order of this Court, affd. .1988 Tax Ct. Memo LEXIS 50">*56 In that litigation, the same arguments petitioner makes in this case were rejected, and the addition to tax under section 6653(b) was sustained against petitioner on facts similar to those presented in this case. In spite of that adverse precedent, petitioner continued to maintain this case. While we are normally reluctant to impose section 6673 damages in fraud cases, the record in this case establishes that petitioner has had no good faith interest in disputing either the tax deficiencies or the additions to tax determined by respondent. The positions set forth by petitioner are without merit. Petitioner's primary purpose in instituting and maintaining this proceeding was for delay. For the reasons set forth above, we award damages to the United States against petitioner in the amount of $ 1,000. An appropriate order will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. At the time of the notice of deficiency in which respondent determined the sec. 6661(a) additions to tax against petitioner, the sec. 6661(a) addition to tax was equal to 10 percent of the underpayment attributable to a substantial understatement. Sec. 6661(a) has twice been amended since then. The Tax Reform Act of 1986, Pub. L. 99-514, sec. 1504(a), 100 Stat. 2085, 2743, increased the sec. 6661(a) addition to tax to 20 percent of the underpayment attributable to a substantial understatement for returns the due date of which, determined without regard to extensions, is after December 31, 1986. The Omnibus Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002(a), 100 25 percent of the underpayment attributable to a substantial understatement for additions to tax assessed after October 21, 1986. Respondent has not amended his answer to seek an increase to the sec. 6661(a) addition to tax over the amount determined in the notice of deficiency. Accordingly, we express no opinion at this time as to the effect of either of the above-referenced acts on sec. 6661(a). We merely sustain respondent's determination of sec. 6661(a) additions to tax equal to 10 percent of the underpayment attributable to the substantial understatements. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620846/	TREAT HARDWARE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Treat Hardware Corp. v. CommissionerDocket No. 4524.United States Board of Tax Appeals6 B.T.A. 768; 1927 BTA LEXIS 3417; April 7, 1927, Promulgated 1927 BTA LEXIS 3417">3417 1. Loss on demolition of portion of building can not be allowed where the cost of the building or the demolished parts is not shown. 2. Deduction for repairs in connection with capital alterations determined. Paul R. Clay, Esq., for petitioner. J. E. Marshall, Esq., for the respondent. TRUSSELL 6 B.T.A. 768">768 The deficiency letter dated April 1, 1925, which is the basis of this proceeding, asserted deficiencies in income and profits taxes for the year 1919 in the amount of $5,479.04, and for the year 1920 in the amount of $5,517.98. The petition alleged a number of errors on the part of the Commissioner respecting both the years 1919 and 1920. Some of these have been abandoned, and others have been settled by stipulation which will be made effective upon final redetermination. The only issues presented to the Board for consideration are whether (1) the petitioner is entitled to a loss of $8,400, resulting from a partial demolition of a building, and (2) a deduction of $12,248.77 for repairs, etc., to the same building. The petitioner's contentions in these respects refer only to the year 1920. FINDINGS OF FACT. The petitioner is engaged1927 BTA LEXIS 3417">3418 in conducting a general hardware store, and for more than 20 years prior to 1919 had been a tenant in a building situated at the corner of Broadway and Essex Streets in the City of Lawrence, Mass. This building was a four-story brick building, 100 feet front on Essex Street and 70 feet in depth. Prior to August, 1919, the petitioner had occupied part of the basement, all of the first floor, except the corner room occupied by a bank, about one-third of the second floor, and a portion of the third floor. Other tenants had occupied portions of the second and third floors and there was a skating rink and hall on the fourth floor. 6 B.T.A. 768">769 In August, 1919, the petitioner purchased this building, and soon thereafter made preparations for and did, during the year 1920, complete changes and modifications in said building, consisting of a general rearrangement of the first floor of the building; adding an extension on the rear; cutting out a portion of the rear wall and extending the wall to the line; taking out the main stairways to the second and third floors; removing most of the partitions which represented the old office partitions of the second floor; removing two office partitions1927 BTA LEXIS 3417">3419 and a storeroom on the second floor; putting in a new elevator and pent house; rearranging the fire escape; straightening up the under side of the third floor with trusses; putting in new windows along the second-story front, and the store fronts on the first floor; and general rearrangement of store fixtures, with some new fixtures; rearranging the steam heating plant; painting the building inside and out; in fact, a general remodeling of the building to adapt it for the new layout. Thereafter, the petitioner occupied the entire building, except a portion used by the bank. The petitioner paid the sum of $135,000 for this property, including land and building. The amount of this purchase price covered the entire property and there was no allocation of the total amount as between land and building. In October, 1919, prior to the making of any changes, an experienced contractor and builder estimated the old building to have a then sound value of $108,250. The same contractor had charge of the remodeling of the building and estimated its sound value after the completion of the alterations to be $164,103. During the years 1919 and 1920, in connection with the changes and modifications1927 BTA LEXIS 3417">3420 of said building, the petitioner paid for labor, material, etc., the sum of $66,290.06. After the changes had been completed in the year 1920, the petitioner spread upon its books of account the amount of $64,244.47, charged to capital and expense as follows: Building$26,020.19Building fixtures6,590.51Store fixtures10,985.00Capital loss8,400.00Repair expense12,248.77In making its income-tax return for the year 1920, the petitioner claimed deductions of $8,400 loss resulting from the demolition of portions of the building herein described, and $12,248.77 as repair expense in connection with the same business. Both of these items were disallowed by the Commissioner. The sum of disbursements properly designated as repairs is $6,238.19. 6 B.T.A. 768">770 OPINION. TRUSSELL: The record of this case contains the testimony of the treasurer of the petitioner corporation, the architect in charge of the remodeling of the building, the contractor who did the work, and a person engaged in real estate and insurance, all of whom testified in detail in respect of the depreciated values of portions of the old building demolished and removed and the items of1927 BTA LEXIS 3417">3421 cost which have been classified as repairs. Among the items of cost classified as repairs appear such items as relocating old steam pipes and radiators; cleaning and painting those portions of the interior of the building which were not changed; lumber and other supplies used in making changes in store and building fixtures; painting the outside of the building, and other labor in connection with work not classified as new construction. The aggregate of these items as specifically set forth in the testimony is $6,238.19, and we have, therefore, found that for the year 1920 the petitioner may deduct from gross income on account of repairs $6,238.19. Claim for the deduction of a loss on account of the demolition of portions of the building is surrounded with difficulties. The record shows that the contractor who did this work found the depreciated values of portions of the old building demolished in classifications as follows: Front alterations and stairways to third floor, $2,800; rear stairways, $350; 3,282 square feet of lath and plaster partitions, $1,650; 1,432 square feet of black walnut paneling in ceiling, $2,864; partition sheathing, $868; three toilets, $500; electric1927 BTA LEXIS 3417">3422 wiring, $500; back hall removed, 35,000 bricks at $60 per thousand, $2,100; fire escape, $250; total, $11,882. The total of these items, however, was not used by the petitioner, either in making entries upon its books or in its claim for a deductible loss, and it apparently reduced the total of these items in the sum of $8,400. The record does not show what items were either omitted or reduced, or why. It may perhaps be assumed that the contractor, in making his statement of depreciated values of portions of the old building demolished, had in mind either the original cost of such items or the cost of such items new at the time of the demolition. Neither of these bases, however, is applicable under the circumstances of this case for the reason that the petitioner purchased this old building, and we are not advised as to what was the allocable portion of the purchase price applicable to the building and are, therefore, unable to determine what may have been the cost to the petitioner of the items demolished. And, although the record is silent respecting any salvage from the demolished portions of the building, like recoverable lumber from partitions and stairways, bricks from the1927 BTA LEXIS 3417">3423 rear wall, etc., which may have entered into and become a part of the new construction, the Board can not overlook the facts of 6 B.T.A. 768">*771 common knowledge that such salvage is practically always present under like conditions. It also appears from the record that the petitioner is claiming the right to charge off, not a portion of the cost of the old building, but a portion of the cost of alterations. We are, therefore, of the opinion that the deduction of the $8,400 claimed was properly disallowed and that the entire cost of alterations, less the amount herein allowed as repairs, should have been or should now be, capitalized so that this amount may be recovered by future depreciation deductions. The deficiencies will be redetermined in accordance with the stipulation in the record and the foregoing findings of fact and opinion upon 15 days' notice, pursuant to Rule 50, and judgment will be entered in due course.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620847/	MURRAY F. DAVENPORT and LELA C. DAVENPORT, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDavenport v. CommissionerDocket No. 6528-74.United States Tax CourtT.C. Memo 1975-369; 1975 Tax Ct. Memo LEXIS 5; 34 T.C.M. 1585; T.C.M. (RIA) 750369; December 30, 1975, Filed Murray F. Davenport, pro se. J. Michael Brown, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioners' Federal income tax for the calendar year 1972 in the amount of $283. One of the issues raised by the pleadings has been disposed of by agreement of the parties, leaving for our decision whether respondent properly disallowed1975 Tax Ct. Memo LEXIS 5">6 $1,034 of petitioners' claimed charitable contributions as not being deductible because of being specified to be for the benefit of a specific individual. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioners, husband and wife, resided in Dallas, Texas at the time the petition in this case was filed. Petitioners filed a joint Federal income tax return for the calendar year 1972 with the Director, Internal Revenue Service Center, Austin, Texas. Petitioners are the father and mother of M.D. Davenport who is the minister, founder, and president of the Everlasting Gospel, Inc. The Everlasting Gospel, Inc. is a charitable organization whose primary function is to preach and do evangelical work throughout the southern part of the United States. It is a charitable organization as defined in section 170(c)(2), I.R.C. 1954, 1 so that contributions to it are deductible by a taxpayer under section 170. Petitioners' son, as the chief evangelist of the Everlasting Gospel, Inc., spends approximately 60 percent of his time traveling throughout the southern United States participating in and forming revival-type services under1975 Tax Ct. Memo LEXIS 5">7 the name the Crusade of the Everlasting Gospel. The Everlasting Gospel, Inc. broadcasts its message over radio stations, generally in the East Texas area. During the taxable year 1972 petitioners made contributions deductible under section 170 to various charitable organizations, including cash contributions to the Everlasting Gospel, Inc. in the amount of $1,152. In addition, in each of the months January through September 1972 petitioners paid $95 directly to the owner of a property on Wilson Street in Dallas, Texas. This property was a five-room house. Petitioners' son traveled throughout the United States with a trailer in which he and his wife and children lived while he was conducting his evangelistic work outside of Dallas, Texas. Murray F. Davenport (hereinafter referred to as petitioner) was of the opinion that a house should be maintained for his son and his son's family to use to live in when they were in Dallas. The son also needed the house in which to leave furniture and personal belongings when he was away from Dallas and to store radio and photographic equipment used in his work1975 Tax Ct. Memo LEXIS 5">8 for the Everlasting Gospel, Inc. Petitioner was also of the opinion that his son needed a place in Dallas to use for taping radio programs for the Everlasting Gospel, Inc. Petitioner's son and the son's family did live in the house on Wilson Street in Dallas when they were in that city, and radio programs for the Everlasting Gospel, Inc. were taped on the Wilson Street premises by use of the radio equipment maintained there by petitioner's son. The Wilson Street house had a living room, a dining room which was in effect more a part of the living room, two bedrooms, a kitchen and a bath. The living room, dining room, and kitchen were used for family living except that an occasional meeting of some type in connection with the work of the Everlasting Gospel, Inc. might be held in this area. One of the bedrooms was used for storing radio and photographic equipment of the Everlasting Gospel, Inc. although there was a bed in this room which was used when the family was in Dallas. The other bedroom had some photographic equipment in it as well as being used as a bedroom. The bathroom was used to develop pictures made for use in the revival work of the Everlasting Gospel, Inc. as well1975 Tax Ct. Memo LEXIS 5">9 as being used by the family when they were living in the house while in Dallas. Petitioners, on their joint income tax return for 1972, deducted under charitable contributions the amount of $2,007. Respondent in his notice of deficiency disallowed $1,034 of these claimed charitable contributions with the following explanation: You may not claim a deduction for amounts given to a charitable organization if you are permitted to specify that your contribution is for the benefit of a specific individual. OPINION Petitioner takes the position that his total claimed charitable contributions of $2,007 were either contributions to "or for the use of" a charitable organization and therefore he should be entitled to the entire deduction claimed by him for charitable contributions. Respondent recognizes that under the provisions of section 170(a) a deduction is allowable for any charitable contribution as defined in section 170(c) paid within the taxable year and that section 170(c) defines a charitable contribution to mean a contribution or gift "to or for the use of" a charity specified therein. 2 Respondent contends that the $855 paid by petitioner at the rate of $95 a month for the1975 Tax Ct. Memo LEXIS 5">10 first 9 months of 1972 for rental of the house on Wilson Street in Dallas, Texas was not a charitable contribution either to or for the use of the Everlasting Gospel, Inc. as that term is used in section 170(c) of the Code. As to the difference between the $855 which was paid by petitioner as rental on the house on Wilson Street in Dallas and the $1,034 disallowed by respondent in his notice of deficiency, respondent1975 Tax Ct. Memo LEXIS 5">11 contends that petitioner has not established that the amount was actually paid as charitable contributions. The record does not support the argument of respondent with respect to the $179 excess of $1,034 over the $855 paid by petitioner as rental on the property on Wilson Street in Dallas. Petitioner not only personally testified as to the contributions made not only to the Everlasting Gospel, Inc. but also to various other charitable organizations such as other churches, but introduced in evidence a detailed record which he kept of such contributions. In our view this is sufficient evidence to make a prima facia case that petitioner made cash charitable contributions of $1,152 in the calendar year 1972 and respondent has offered no contrary evidence. Furthermore, respondent's sole basis for disallowance of any portion of petitioner's claimed deduction for charitable contributions was on the ground that the amount of $1,034 was paid for a specific person. We conclude from the evidence and have so found in our findings that petitioner did make charitable contributions in the year 1972 in the amount of $1,152. The record is clear that the $95 payments for each month of January through1975 Tax Ct. Memo LEXIS 5">12 September 1972 were made directly to the owner of the house on Wilson Street for rental of the property and that petitioner made these payments in order that his son and his son's family might have a place to live when they were in Dallas, Texas. Petitioner contends that the Everlasting Gospel, Inc. would have had to maintain a home in Dallas for its minister and a place in which to store its radio and photographic equipment and to tape radio programs if he had not paid for rental on the Wilson Street house. Petitioner concludes from this contention that he should be entitled to his claimed deduction as a payment he made that otherwise the Everlasting Gospel, Inc. would have found it necessary to make. Petitioner's contention is not supported by the facts in this case and even if it were, his conclusion therefrom would not be proper. The cases are clear that the criteria for determining whether an amount is a charitable contribution is not whether the payment which is not made directly to the charity might incidentally relieve the charity of some cost but rather whether the payment is such1975 Tax Ct. Memo LEXIS 5">13 that the contribution is "for the use of" the charity in a meaning similar to "in trust for." S. E. Thomason,2 T.C. 441">2 T.C. 441 (1943). The Thomason case involved a payment made by a taxpayer directly to an educational institution for the education and maintenance of a child who was a ward of the IllinoisChildren's Home and Aid Society. The taxpayer there contended that since the IllinoisChildren's Home and Aid Society would have had to pay for the education and maintenance of this boy had he not done so, his payments were payments "for the use of" that society. In holding that the amount paid by the taxpayer in the Thomason case to the educational institution was not a charitable contribution for the use of the IllinoisChildren's Home and Aid Society, we pointed out that these payments were earmarked "from the beginning not for a group or class of individuals, not to be used in any manner seen fit by the society, but for the use of a single individual in whom" the taxpayer "felt a keen fatherly and personal interest." In that case we pointed out that charity begins where certainty in beneficiaries ends, quoting from a Supreme Court case which held that the uncertainty1975 Tax Ct. Memo LEXIS 5">14 of the objects of the donation is an essential element of charity. Here, whether the Everlasting Gospel, Inc. would have chosen to maintain a house in Dallas for the use of petitioner's son and his family as living quarters when in Dallas and for storing radio and photographic equipment, as well as petitioner's son's personal belongings, is not shown by this record. It may have been that had petitioner paid the $855 directly to the Everlasting Gospel, Inc., that organization would have chosen to use the funds otherwise, store its equipment elsewhere and let petitioner's son and his family use their trailer to live in when in Dallas as they did when they traveled out from Dallas. However, even were there something in this record to indicate that the Everlasting Gospel, Inc. would have rented a house in Dallas for the use of petitioner's son and for storing radio and photographic equipment, it would not follow that the deduction would be allowable since by making the payments directly to the landlord petitioner took away the option of the Everlasting Gospel, Inc. with respect to its use of the funds. As we have pointed out in several cases, 1975 Tax Ct. Memo LEXIS 5">15 the charity must have full control of the funds donated in order for a taxpayer to be entitled to a charitable deduction, and such is not the situation where the funds are designated by the donor for the use of a particular individual. See Mozelle C. Kluss,46 T.C. 572">46 T.C. 572 (1966); Archibald W. McMillan,31 T.C. 1143">31 T.C. 1143 (1959); and 2 T.C. 441">S. E. Thomason,supra.Cf. George E. Peace,43 T.C. 1">43 T.C. 1, 43 T.C. 1">7-8 (1964), in which we reiterated that the taxpayer's contribution, though he suggested specific missionaries to be supported therewith, was to go into the charity's common fund to be administered and distributed by the charity as it desired. In 43 T.C. 1">George E. Peace,supra, we pointed out that the taxpayers' designation of three or four missionaries to be supported by their donation was merely a manifestation of their desire to have their donations credited to the support allowance of those individuals and not an intent that the charity be limited in using the funds as it saw fit. As we pointed out in 46 T.C. 572">Mozelle C. Kluss,supra at 575, although other factors are relevant, in1975 Tax Ct. Memo LEXIS 5">16 determining whether an amount is deductible as a charitable contribution one critical factor is the donor's intent. In the instant case, in our view the evidence as a whole shows that it was petitioner's intent to benefit his son by insuring that his son have a place to live with his family when in Dallas. Under these circumstances the payments were for the use or benefit of a particular individual, petitioner's son, and therefore are not charitable deductible contributions under section 170, even though incidentally the payments made by petitioner may have relieved the Everlasting Gospel, Inc. of the necessity of paying for a place for petitioner's son to live when he was in Dallas. Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended.↩2. SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS. * (c) Charitable Contribution Defined.--For purposes of this section, the term "charitable contribution" means a contribution or gift to or for the use of-- * (2) a corporation, trust, or community chest, fund, or foundation-- (A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any possession of the United States; (B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals; * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4537527/	If this opinion indicates that it is “FOR PUBLICATION,” it is subject to revision until final publication in the Michigan Appeals Reports. STATE OF MICHIGAN COURT OF APPEALS PEOPLE OF THE STATE OF MICHIGAN, UNPUBLISHED May 28, 2020 Plaintiff-Appellee, v No. 348561 Manistee Circuit Court CHRISTOPHER RYAN PERSKI, LC No. 18-004804-FC Defendant-Appellant. Before: MARKEY, P.J., and JANSEN and BOONSTRA, JJ. PER CURIAM. Defendant was convicted by no-contest plea of first-degree home invasion, MCL 750.110a(2), receiving or concealing a firearm, MCL 750.535b(2), felon in possession of a firearm, MCL 750.224f(1), and receiving or concealing stolen property that has a value of $1,000 or more but less than $20,000 (RCSP), MCL 750.535(3)(a). He was sentenced to 8 to 20 years’ imprisonment for the home invasion conviction, 2 to 10 years’ imprisonment for his conviction of receiving or concealing a firearm, 2 to 5 years’ imprisonment for the felon-in-possession conviction, and 2 to 5 years’ imprisonment for the RCSP conviction. The trial court ordered defendant to serve the home invasion sentence consecutively to the RCSP sentence. Defendant appeals by delayed leave granted the imposition of consecutive sentences. We affirm. The victim reported that he woke up to find that his PlayStation 4, six games, and a change jar were missing from his home. Upon investigation, the police searched a home where defendant resided and found the PlayStation 4 and the six games. The change jar was not located, but approximately $114 in change was discovered. Other stolen property was also found at the house, including a gun, a scope for a rifle, fishing rods, and chainsaws. The PlayStation 4 was valued at $399, the games were valued at $50 each for a total of $300, the rifle scope was valued at $275, and the fishing rods were valued at approximately $1,750. The property values were established at the preliminary examination. On appeal, defendant argues that the trial court failed to articulate the specific reasons for imposing consecutive sentences and that the home invasion and RCSP offenses did not arise from the same transaction as required for imposition of consecutive sentences. A trial court’s decision -1- to sentence a defendant to serve consecutive sentences is reviewed for an abuse of discretion. People v Norfleet, 317 Mich App 649, 664; 897 NW2d 195 (2016). An abuse of discretion occurs when the trial court’s decision falls outside the range of reasonable and principled outcomes. Id. MCL 750.110a(8) provides that “[t]he court may order a term of imprisonment imposed for home invasion in the first degree to be served consecutively to any term of imprisonment imposed for any other criminal offense arising from the same transaction.” With respect to defendant’s articulation argument, at the sentencing hearing, the trial court almost immediately asked, “The home invasion first degree is subject to a consecutive sentence, is that correct?” The prosecutor responded that imposing a consecutive sentence was indeed an available option at the discretion of the court. The trial court then noted that consecutive sentencing had to be specifically related to one of the other felonies. And there was a consensus that the other felony was RCSP. The trial court, in a clear reference to consecutive sentencing, then noted: And I explained to [defendant] at the time of the plea that, although the habitual-offender notice was being dismissed as part of the plea agreement, there is the discretionary sentencing nature of the statute that applies to the home invasion in the first degree[.] Defense counsel spoke on behalf of defendant and observed that the probation officer who authored the presentence investigation report was “well aware” of the trial court’s discretion to impose consecutive sentences and opted not to make that recommendation. The trial court proceeded to discuss defendant’s extensive criminal record, which included three prior felony and nine misdemeanor convictions, the goals of sentencing, the fact that defendant did not challenge the scoring of the guidelines, and the need for the court to impose proportionate sentences. Next, immediately before imposing the various sentences, including the consecutive sentences, the trial court stated: The home invasion in the first degree crime involved your going into a home in this community while individuals were asleep, and you can never - - I appreciate your statements to the Court, but I suspect truly being able to compensate the home owners and return to them a sense of safety is something that would be incredibly difficult to achieve. You simply have taken something that is really priceless and that’s their security; as such the Court finds the following sentence[s] to be proportionate. We rely on Norfleet, 317 Mich App 649, to analyze and resolve the issue. An important aspect of Norfleet is that the defendant there was convicted of seven drug-related crimes and the sentencing “court directed that each of the sentences for the first five counts be served consecutively.” Id. at 657. There were five consecutive sentences imposed by the court, and it is in that context that the Court held as follows: [A] trial court may not impose multiple consecutive sentences as a single act of discretion nor explain them as such. The decision regarding each consecutive sentence is its own discretionary act and must be separately justified on the record. The statute clearly provides that a discretionary decision must be made as to each -2- sentence and not to them all as a group. . . . While imposition of more than one consecutive sentence may be justified in an extraordinary case, trial courts must nevertheless articulate their rationale for the imposition of each consecutive sentence so as to allow appellate review. . . . . In the instant case, the trial court spoke only in general terms, stating that it took into account defendant's background, his history, and the nature of the offenses involved. Moreover, it did not speak separately regarding each consecutive sentence, each of which represents a separate exercise of discretion. Therefore, the trial court did not give particularized reasons—with reference to the specific offenses and the defendant—to impose each sentence . . . consecutively to the others. Remand is therefore necessary so that the trial court can fully articulate its rationale for each consecutive sentence imposed. [Id. at 665-666 (quotation marks, citations, and alterations omitted).] In the instant case, we are addressing one consecutive sentence. Moreover, as reflected in our earlier discussion of the record, the issue of the trial court’s discretion to impose a single consecutive sentence was at the forefront of sentencing and an obvious focus of the court’s attention. We conclude that it is readily evident that the trial court’s remarks about defendant’s extensive and dreadful criminal history and the lost sense of security suffered by the victims of the brazen crimes served as the court’s reasons for imposing consecutive sentences. We are not forced to weed through multiple consecutive sentences and attempt to match them to reasons for their imposition. On appeal, defendant examines in a vacuum that point in the sentencing hearing when consecutive sentences were ordered, failing to give the proper context to the decision by considering the remainder of the sentencing record. We see no basis to remand this case for further articulation. Defendant also argues that the trial court erred by imposing consecutive sentences because the offenses of home invasion and RCSP did not arise from the same transaction as required by MCL 750.110a(8). The term “same transaction” is not statutorily defined, but the term has developed a unique legal meaning. People v Ryan, 295 Mich App 388, 402; 819 NW2d 55 (2012). Two separate criminal offenses committed by the same person can occur within the “same transaction.” Id. Offenses can arise from the same transaction when they grow out of a continuous time sequence. Id. Language such as “arising from” or “arising out of” suggests a causal connection, a cause and effect relationship, or a connective relationship between two events of a sort that is more than incidental. Id. at 403. In the instant case, during the commission of the home invasion by defendant, he removed items from the victim’s house, transported them, and then concealed the items in defendant’s residence. Thus, there was a causal connection, a cause and effect relationship, or a connective relationship between the offenses of home invasion and RCSP that was more than incidental, and the offenses were part of a continuous time sequence. Defendant is correct that the value of the items stolen in the home invasion and then found in his residence, on their own, did not amount to the required minimum of $1,000 for purposes of the RCSP charge. But this does not mean that the offense of RCSP did not arise from the home invasion transaction—the offense arose from a -3- combination of the home invasion and other criminal activity.1 As such, consecutive sentencing was an option for the trial court. We affirm. /s/ Jane E. Markey /s/ Mark T. Boonstra 1 At the preliminary examination, the district court indicated that it was taking into consideration the items stolen from the victim’s home, along with the other stolen items discovered in defendant’s home, when calculating the total value in relation to the RCSP charge. And at the subsequent plea hearing, defendant agreed with the trial court that it could use the preliminary examination as establishing the factual basis for his no-contest plea. Accordingly, the RCSP conviction was not based exclusively on stolen items that were not part of the home invasion. -4-	01-04-2023	05-29-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620880/	Valmont Industries, Inc., a Delaware Corporation and Its Consolidated Subsidiaries, Petitioner v. Commissioner of Internal Revenue, RespondentValmont Industries, Inc. v. CommissionerDocket No. 4774-77United States Tax Court73 T.C. 1059; 1980 U.S. Tax Ct. LEXIS 170; March 12, 1980, Filed 170 Decision will be entered under Rule 155. Held, petitioner failed to prove that respondent abused his discretion in disallowing part of its additions to its bad debt reserve. Held, further, petitioner's galvanizing facilities were buildings within the meaning of sec. 48(a)(1)(B), I.R.C. 1954, and, therefore, did not qualify for the investment credit. Held, further, petitioner's use of double declining balance depreciation on its galvanizing facilities denied. Held, further, petitioner is not entitled to depreciation and investment credit on the zinc charge to its galvanizing kettles. Robert V. Dwyer, Jr., for the petitioner.Leonard A. Hammes, for the respondent. Wiles, Judge. WILES1059 Respondent determined the following deficiencies in petitioner's Federal income taxes:Taxable yearDeficiencyJan. 1, 1972 -- Dec. 30, 1972$ 128,030Dec. 31, 1972 -- Dec. 29, 1973133,238Dec. 30, 1973 -- Dec. 28, 1974179,947After concessions, the remaining issues for decision are:1060 (1) Whether respondent abused his discretion under section 166(c)1171 by disallowing part of petitioner's addition to its bad debt reserve for the taxable years ended December 29, 1973, and December 28, 1974.(2) Whether petitioner's two galvanizing facilities were eligible for the investment tax credit under section 38.(3) Whether petitioner can depreciate its galvanizing facilities under the double declining balance method.(4) Whether petitioner is entitled to depreciation and an investment tax credit on the initial zinc charge to its galvanizing kettles.FINDINGS OF FACTSome facts were stipulated and are found accordingly.Petitioner, a Delaware corporation and its consolidated subsidiaries, maintained its principal office in Valley, Nebr., when it filed its petition in this case. Petitioner filed consolidated corporate income tax returns for each of the taxable years ended December 30, 1972, December 29, 1973, and December 28, 1974, with the Internal Revenue Service Center, Ogden, Utah.Issue 1. Bad Debt ReserveDuring the years at issue, petitioner was engaged in the manufacture and sale of center pivot irrigation systems, mechanical tubing and pipe, lighting standards and transmission poles. The irrigation systems were petitioner's principal product line accounting for 70 to 75 percent of its total business in 1974. In that year, 172 petitioner sold its irrigation systems to approximately 80 to 100 dealers throughout the United States at a price of $ 20,000 to $ 25,000 per system. The lighting standards were sold to various public, private, and governmental entities. About 70 percent of petitioner's customers for lighting standards were electric utilities. Petitioner sold its entire line of products on open account and, except for its sales of irrigation systems, required no security from the purchasers.In 1974, petitioner's sales of irrigation equipment increased dramatically. This rapid sales increase was matched by an equally substantial increase in petitioner's accounts receivable. 1061 The trend in petitioner's accounts receivable outstanding from 1968 through 1975 was as follows:Accounts receivableYearoutstanding end of year1968$ 1,859,97919691,218,24119701,787,67519712,291,51019724,212,21319733,537,58919747,694,76919758,372,363Faced with this increased exposure, petitioner, in 1974, secured the open account risk on its irrigation line with a blanket security filing pursuant to the Uniform Commercial Code. This filing allowed petitioner to retain title to the equipment until full payment was received. Also, 173 in 1974, petitioner carried on its books approximately $ 339,000 for future cash discounts offered to customers as an inducement to pay their accounts.At the close of 1974, approximately 15 to 20 customers each owed petitioner amounts in excess of $ 100,000. In addition, petitioner had receivables of $ 2,150,000 which were 30 days or more overdue and $ 373,000 of receivables which were 90 days or more overdue.In February 1975, petitioner's credit manager, Lee Salmans, prepared a memorandum listing certain 1974 accounts as "doubtful." Many of these accounts were labeled as doubtful because of disputes with petitioner concerning workmanship defects and slow delivery of shipments. Salmans submitted this memorandum to petitioner's controller, Brian Stanley, for his use in preparing petitioner's 1974 income tax return. Most of these "doubtful" accounts were subsequently collected by petitioner.Petitioner used the reserve method of accounting for bad debts under which it deducted the annual additions to the reserve. The following chart represents a breakdown of petitioner's bad debt reserve from 1968 through 1975: 1062 Bad debtAmountsAmountsNet amountBalance inreserve atadded tochargedchargedbad debtbeginningbad debtagainst badafterreserve atYearof yearreservedebt reserveRecoveriesrecoveriesend of year1968$ 28,129$ 26,283$ 17,9100$ 17,910$ 36,502196936,50214,8971,73898974950,650197050,65068,09268,0001,50066,50052,242197152,24211,97738,46021738,24325,976197225,97657,44611,39467210,72272,700197372,700106,92962,7093,08059,629120,0001974120,000203,71012,0345,3246,710317,0001975317,0002174 23,63313,8809,7533 The amounts to be added to the reserve for 1974 were determined by Brian Stanley with the advice of a nationally known firm of certified public accountants whom petitioner had hired to audit its financial statements. Although he relied heavily upon the accounting firm's recommended reserve level, Stanley also made an independent examination of petitioner's bad debt posture. After reviewing all the factors which he considered to be relevant, Stanley concluded that a $ 317,000 reserve was appropriate for the end of fiscal 1974.On its income tax returns for the fiscal years ended December 29, 1973, and December 28, 1974, petitioner deducted $ 106,929 and $ 203,710, respectively, as additions to its bad debt reserve. Respondent, after applying the Black Motor Co. formula, 4 determined that the additions for 1973 and 1974 were excessive to the extent of $ 74,011 and $ 175,275, respectively, and accordingly, disallowed those amounts in his notice of deficiency. Respondent's computations based upon the Black Motor Co. formula for 1973 175 were as follows:OutstandingFiscal yearreceivablesBad debt (net)Ratio of losses1968$ 1,859,979$ 17,9100.96%19691,218,2417490.06%19701,787,67566,5003.72%19712,291,51038,2431.67%19724,212,21310,7220.25%19733,537,58959,6291.69%14,907,207193,7531.30%Accounts and notes receivable, Dec. 31, 1973$ 3,537,589Reserve on Dec. 31, 1973, as adjusted (1.30% of$ 3,537,589)45,989Add: Losses charged to reserve in the taxableyear (1973)$ 62,709Less recoveries3,08059,629Total reserve requirement$ 105,618Deduct: Reserve as adjusted Dec. 31, 197272,700Allowable addition to reserve for 197332,918Addition to reserve deducted per return106,929Allowable addition to reserve for 197332,918Adjustment to increase income74,0111063 Respondent's computations based on the Black Motor Co. formula for 1974 were as follows:YearReceivablesBad debts (net)Ratio of losses1969$ 1,218,241$ 7490.06%19701,787,67566,5003.72%19712,291,51038,2431.67%19724,212,21310,7220.25%19733,537,58959,6291.69%19747,694,7696,7100.09%20,741,997182,5530.88%Accounts and notes receivable, Dec. 31, 1974$ 7,694,769Reserve on Dec. 31, 1974 as adjusted (0.88% of$ 7,694,769)67,714Add: Losses charged to the reserve in the taxableyear (1974)$ 12,034Less recoveries5,3246,710Total reserve requirement74,424Deduct: Reserve as adjusted Dec. 31, 19735176 45,989Allowable addition to reserve for 197428,435Addition to reserve deducted per return203,710Allowable addition to reserve for 197428,435Adjustment to increase income175,275Issues 2 through 4. Investment Credit and Depreciation .In 1966, petitioner built an enclosed structure known as unit 509. This unit is primarily a manufacturing facility for petitioner's irrigation and light pole product lines. A section of unit 509, representing approximately 25 percent of the total area, houses a galvanizing process. Galvanizing is a zinc treatment that petitioner applies to the metal products it manufactures to extend their useful lives. The galvanizing portion of unit 509 has a clear span construction with no interior supports of the roof. It is 216 feet long and approximately 59 feet wide. The eave height is 32 1/3 feet and the peak height of the structure is 36 2/3 feet. Mounted on the primary structure mainframe is an overhead craneway system. The galvanizing section is connected with the remainder of unit 509 by a doorway and common wall.During 1972, the galvanizing facility in unit 509 was temporarily 1064 closed down. The roof and walls which enclosed that section, originally constructed with corrugated metal, had been damaged extensively by the corrosive fumes of the acid used in the galvanizing 177 process. To remedy this problem, petitioner removed both the entire roof and all the walls of the galvanizing portion of unit 509 leaving only the structural steel frame standing. The damaged areas were subsequently reconstructed and covered with duraform, an acid-resistant, polyethylene-based material. The steel frame was cleaned and painted with an acid-resistant coating. At the same time, all of the rubber- and brick-lined, steel galvanizing tanks in unit 509 were removed and replaced with steel and concrete tanks. The platform upon which these tanks sat was also replaced during that period. The refurbished galvanizing facility was placed in service during 1972.In 1972, petitioner also constructed and placed in service a second galvanizing facility known as unit 513. Unlike unit 509, however, unit 513 was specifically built to house a galvanizing process in its entirety. The primary structure of this facility is 331 feet long by 79 feet wide with 50-foot-high sidewalls. The clear span structural frame consists of glue-laminated wood mainframes and wood framing members. These materials were used because they can better withstand the acid fumes and heat generated by the galvanizing 178 process than can conventional steel beams. For the same reason, the structure has duraform siding rather than sheet metal siding. The roof is approximately 54 feet high and is made of built-up tar and gravel. Mounted on the primary structure of unit 513, immediately below the roof, is an overhead craneway system used to transport the metal products through the various stages of the galvanizing process. The entire structure of unit 513 is supported by a concrete foundation.Attached to the primary structure and constituting a part of unit 513 is a 104-foot-long by 24-foot-wide enclosed structure which serves as a housing for the mechanical and boiler room, laboratory, lunchroom, restrooms, and office. This structure has a height of 17 feet and is constructed of concrete block. The roof of this appendage is made of the same material as the roof of the primary structure.Located at the entry end of unit 513 is an open concrete floor area, 82 feet long by 79 feet wide, which is used primarily as a loading station. The next area of the facility, measuring 131 feet 1065 by 79 feet, consists of a raised concrete platform approximately 4 feet above the floor which supports the steel and concrete 179 galvanizing tanks. Each of these tanks is 8 2/3 feet deep of which 2 1/3 feet extends below the floor level. The walls of each concrete tank (8 walls) are 57 feet long, and approximately 1 foot thick. A 4-foot-high concrete bunker separates this processing area from the initial loading end of unit 513.Also located on the raised platform is the galvanizing kettle, a long, 2-inch-thick, 8-foot-deep steel tank containing molten zinc. It rests on a concrete pile cap system completely surrounded by a double firebrick wall and firebrick constructed furnace. The zinc content in this galvanizing kettle is maintained at near 100-percent capacity. This is done to insure that the products can be completely submerged in the molten zinc and to prevent the potential development of "hot spots" which would destroy the kettle. Since zinc is absorbed in the galvanizing process, additional zinc must be added to the kettle at various intervals. To maintain the desired level, approximately 20 percent of the zinc must be replaced every month. The galvanizing kettle is separated from the other process tanks by a concrete bunker.The kettles in both units 509 and 513 were initially filled (charged) with 180 zinc ingots which were melted in the tanks. In 1972, the cost of the initial zinc charges necessary to fill those kettles was $ 109,890.72 and $ 170,827.56, respectively.The final interior section of unit 513, the post-processing end, is an open concrete floor area, 118 feet by 79 feet, used to unload and cleanup the newly galvanized product. Approximately 60 percent of the total floor area in unit 513 is flat, open space where either hookup or cleanup activities take place.Located on both sides of unit 513 are two 28-foot by 24-foot steel vertical rollup doors through which material and products are moved into and out of the facility. These doors are large enough so that, if necessary, the steel process tanks can be readily removed from the facility without damaging the structural portions thereof.Petitioner's galvanizing process is a manual step operation where, at each stage, employees perform various functions with respect to the product to be galvanized. In unit 513, four to six employees work in the entry area on hookup operations. These employees also plug up any holes they find in the product before it is processed. On the raised platform area, there are two crane 1066 operators 181 and two paddlers. The crane operators manually control the craneway system which transports the products through the entire galvanizing process. The paddlers skim off the zinc oxide residue that often forms on top of the kettle. In the post-processing section, six employees are involved in unhooking the product from the crane and cleaning it up. Various hand tools, such as files and impact guns, are used in this cleanup operation.The employees in the galvanizing facility of unit 509 perform these same operations but on a smaller scale. Thus, two employees work in the entry area, four work on the platform, and another four employees work in the post-processing section.On June 1, 1978, respondent's representatives inspected units 509 and 513. At that time, petitioner's employees were in the process of covering over the galvanizing tanks in unit 509 with plywood in order to use the platform area as temporary storage for a planned solar manufacturing venture.On its income tax return for the taxable year ended December 30, 1972, petitioner claimed an investment credit on the entire reconstructed galvanizing enclosure of unit 509 and on the entire structural enclosure of unit 513. 6182 In his notice of deficiency, respondent determined that these structures do not constitute qualifying section 38 property and, accordingly, denied the credit.In its returns for the 3 years at issue, petitioner also claimed depreciation deductions on those properties using a 200-percent declining balance method. Respondent recomputed petitioner's depreciation allowance under a 150-percent declining balance method and disallowed the excess. Finally, on its return for the taxable year ended December 30, 1972, petitioner capitalized the cost of the initial zinc charges in the galvanizing kettles and claimed depreciation and investment credit on those charges. Respondent disallowed both the depreciation deduction and the investment credit.OPINIONIssue 1. Bad Debt ReserveThe first issue is whether respondent abused his discretion by 1067 disallowing part of petitioner's additions to its reserve for bad debts for fiscal years 1973 and 1974. In lieu of deducting specific debts which become worthless within the taxable year, section 166(c)183 allows, in the discretion of the Commissioner, a deduction for a reasonable addition to a reserve for bad debts. A bad debt reserve is essentially an estimate of future losses which can reasonably be expected to result from debts outstanding at the close of the taxable year. Handelman v. Commissioner, 36 T.C. 560">36 T.C. 560 (1961). In determining what constitutes reasonable addition, section 1.166-4(b)(1), Income Tax Regs., provides as follows:(1) Relevant factors. What constitutes a reasonable addition to a reserve for bad debts shall be determined in the light of the facts existing at the close of the taxable year of the proposed addition. The reasonableness of the addition will vary as between classes of business and with conditions of business prosperity. It will depend primarily upon the total amount of debts outstanding as of the close of the taxable year, including those arising currently as well as those arising in prior taxable years, and the total amount of the existing reserve.If the existing reserve is already adequate to cover expected losses, any further additions will be considered unreasonable and, thus, not deductible. Messer Co. v. Commissioner, 57 T.C. 848">57 T.C. 848, 864 (1972).In 184 view of the discretion granted respondent by section 166(c), his determination as to the reasonableness of any addition made to a bad debt reserve carries more than the usual presumption of correctness. Roth Steel Tube Co. v. Commissioner, 68 T.C. 213">68 T.C. 213, 218 (1977); Roanoke Vending Exchange, Inc. v. Commissioner, 40 T.C. 735">40 T.C. 735, 741 (1963). Therefore, petitioner must not only show that its additions to the reserve were reasonable, but must also demonstrate that respondent's disallowance of the claimed additions was arbitrary and constituted an abuse of discretion. Westchester Development Co. v. Commissioner, 63 T.C. 198">63 T.C. 198, 211 (1974).In disallowing a portion of petitioner's additions to its reserve for fiscal years 1973 and 1974, respondent applied the 6-year moving average formula approved by this Court in Black Motor Co. v. Commissioner, 41 B.T.A. 300">41 B.T.A. 300 (1940), affd. 125 F.2d 977">125 F.2d 977 (6th Cir. 1942), on another issue. 7 This formula, based entirely on petitioner's past chargeoff experience, yielded an average bad 1068 debt ratio of 1.30 percent for the 6-year period ending December 1973 and 0.88 percent for the 6-year period ending December 1974. After multiplying these percentages by the 1973 185 and 1974 yearend outstanding receivables, respondent arrived at a reasonable reserve requirement of $ 45,989 and $ 67,714, respectively. Accordingly, to the extent petitioner's additions exceeded the amount necessary to bring the reserve balance to these levels, respondent disallowed the deductions.Petitioner contends that respondent's application of the Black Motor Co. formula and his failure to consider other factors in existence at the end of 1974 amounted to a clear abuse of discretion. 8 Petitioner argues that a pure historical approach for determining its 1974 reserve requirements was arbitrary and unreasonable because it ignored such relevant "current" factors as the deteriorating economic conditions in the industry, the enormous increase in accounts receivable, the age of its receivables, the large number of doubtful and contested accounts, and the risk of substantial loss should a number of specific accounts become worthless. In support of its position, petitioner cities Calavo, Inc. v. Commissioner, 304 F.2d 650">304 F.2d 650 (9th Cir. 1962), revg. a Memorandum 186 Opinion of this Court; Westchester Development Co. v. Commissioner, supra;Richardson v. United States, 330 F. Supp. 102">330 F. Supp. 102 (S.D. Tex. 1971); and Apollo Steel Co. v. Commissioner, a Memorandum Opinion of this Court dated April 13, 1945. Respondent argues that the allowable reserve was more than sufficient to cover the 1975 estimated losses. On the record before us, we must agree.After a careful examination of the record, we conclude that petitioner has not satisfied its "heavy burden" of showing respondent abused his discretion. Although disregard of a taxpayer's changed business circumstances can constitute such an abuse ( Richardson v. United States, supra), petitioner has failed to demonstrate that changed conditions in 1974 caused collection of its outstanding debts to be less likely than in the past. Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522 (1979). Petitioner argues that there were deteriorating economic conditions in 187 late 1974 which adversely affected collectibility of its accounts. While the record does indicate a slight market 1069 downturn during that period, there is no evidence that comparable business declines did not exist in prior years. In this connection, we note that the Black Motor Co. formula covers a 6-year span during which time a variety of economic fluctuations would normally occur. Accordingly, absent any evidence that this particular market decline was somehow unrepresentative, we find petitioner's reliance on this circumstance misplaced.Moreover, the substantial increase in petitioner's accounts receivable during 1974 does not make the Black Motor Co. formula inapplicable. To the contrary, since the computation of the reserve, under that method, is based upon the total yearend receivables, the formula necessarily incorporates and is directly responsive to such changes in business volume. Atlantic Discount Co. v. United States, 473 F.2d 412">473 F.2d 412, 415 (5th Cir. 1973).In addition, the record does not reveal whether petitioner's credit policy had been more restrictive in the past or that its delinquencies were on the rise. The testimony of Lee Salmans reveals that petitioner was quite 188 willing to accept slow payment from certain customers in order to penetrate various geographical markets. Consequently, petitioner's evidence regarding the aging of its receivables, without more, is simply insufficient to overcome respondent's discretionary application of the Black Motor Co. formula. Cf. Messer Co. v. Commissioner, supra;United States v. Haskel Engineering & Supply Co., 380 F.2d 786">380 F.2d 786 (9th Cir. 1967).Furthermore, despite the reported claims of doubtful and contested accounts, petitioner failed to offer credible evidence establishing that payment from any specific customer in 1975 was unlikely. Although petitioner argues that certain designated customers were in weak financial positions during 1974, there is nothing in the record to indicate that those customers were financially healthy in prior years. Nor does the record show that petitioner was confronted with any extraordinary credit reversals in 1974 which rendered its past bad debt experience an unreliable guide for measuring probable future losses. Compare Calavo, Inc. v. Commissioner, supra, and Apollo Steel Co. v. Commissioner, supra.Petitioner's argument that the potential worthlessness of its larger accounts 189 justifies a greater addition to its reserve than allowed by respondent misses the point. While we can appreciate petitioner's sound business desire to protect itself against the 1070 risk of significant losses in subsequent years, a reserve established for such purposes is not the type contemplated by section 166(c). Massachusetts Business Development Corp. v. Commissioner, 52 T.C. 946">52 T.C. 946, 952 (1969); Investors Discount Corp. v. Commissioner, 48 T.C. 767">48 T.C. 767, 771 (1967). Moreover, considering the security filings placed on its irrigation products in 1974, the potential risk of future loss to petitioner was actually minimized.Still further support for respondent's determination is provided by an examination of petitioner's bad debt history. During the 6-year period ending in December 1974, petitioner's actual bad debts averaged less than 1 percent of its outstanding receivables. For every year but 1970, petitioner's reserve, without additions, exceeded the actual bad debts suffered. In 1974, when the volume of its receivables nearly doubled over 1973, petitioner's bad debts decreased even more drastically. While the record does not indicate all the factors responsible for the decrease, it 190 is reasonable to assume that petitioner's collection practices and the cash discounts offered to its customers had significant effects.In light of this recent bad debt history, we believe that collectibility of petitioner's outstanding receivables was in fact more likely at the end of 1974 than in most of the years upon which respondent based his average. Cf. Thor Power Tool Co. v. Commissioner, supra.As it turned out, a balance of $ 67,714 in its bad debt reserve for fiscal 1974 would have been more than ample to offset the $ 9,753 in actual bad debts incurred during 1975. While our decision cannot rest upon this subsequent loss experience ( Westchester Development Co. v. Commissioner, supra at 212), nevertheless, these subsequent losses are considered additional evidence corroborating the reasonableness of respondent's adjustments. Roanoke Vending Exchange, Inc. v. Commissioner, supra at 741. Under these circumstances, we hold that petitioner has failed to prove that respondent's disallowance of the claimed additions amounted to an abuse of discretion.Issue 2. Investment CreditThe second issue is whether petitioner is entitled to a tax credit under section 389 in 1972 for 191 its investment in two 1071 galvanizing facilities designated as units 509 and 513. The resolution of this issue depends upon whether these structures qualify as "section 38 property" as that term is defined by section 48. Section 48, in part, provides:SEC. 48. DEFINITIONS: SPECIAL RULES.(a) Section 38 Property. -- (1) In General. -- Except as provided in this subsection, the term "section 38 property" means -- (A) tangible personal property, or(B) other tangible property (not including a building and its structual components) but only if such property --(i) is used as an integral part of manufacturing, production or extraction * [Emphasis added.]Respondent contends that unit 513 and the galvanizing portion of unit 509 are "buildings" for which an investment credit is not allowable. Petitioner argues that these structures are 192 not "buildings" within the meaning of section 48, but instead, are "other tangible property" used as an integral part of its production process. For the reasons set out below, we agree with respondent.Pursuant to section 38(b), respondent, in sec. 1.48-1(e), Income Tax Regs., has defined the term "buildings" as follows:Sec. 1.48-1 Definition of section 38 property.(e) Definition of building and structural components. (1) Buildings and structural components thereof do not qualify as section 38 property. The term "building" generally means any structure or edifice enclosing a space within its walls, and usually covered by a roof, the purpose of which is, for example, to provide shelter or housing, or to provide working, office, parking, display, or sales space. The term includes, for example, structures such as apartment houses, factory and office buildings, warehouses, barns, garages, railway or bus stations, and stores. Such term includes any such structure constructed by, or for, a lessee even if such structure must be removed, or ownership of such structure reverts to the lessor, at the termination of the lease. Such term does not include (i) a structure which is essentially 193 an item of machinery or equipment, or (ii) a structure which houses property used as an integral part of an activity specified in section 48(a)(1)(B)(i) if the use of the structure is so closely related to the use of such property that the structure clearly can be expected to be replaced when the property it initially houses is replaced. 1072 Factors which indicate that a structure is closely related to the use of the property it houses include the fact that the structure is specifically designed to provide for the stress and other demands of such property and the fact that the structure could not be economically used for other purposes. Thus, the term "building" does not include such structures as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples.This regulation reflects congressional intent that the term "building" be given its commonly accepted meaning. Satrum v. Commissioner, 62 T.C. 413">62 T.C. 413, 416 (1974); H. Rept. 1447, 87th Cong., 2d Sess. (1962), 3 C.B. 516">1962-3 C.B. 516; S. Rept. 1881, 87th Cong., 2d Sess. (1962), 3 C.B. 858">1962-3 C.B. 858-859.This regulation has been construed as establishing 194 a function or use test for determining whether a given structure was a "building." Lesher v. Commissioner, 73 T.C. 340">73 T.C. 340 (1979); Brown-Forman Distillers Corp. v. United States, 205 Ct. Cl. 402">205 Ct. Cl. 402, 499 F.2d 1263">499 F.2d 1263 (1974). Thirup v. Commissioner, 508 F.2d 915">508 F.2d 915, 919 (9th Cir. 1974), revg. 59 T.C. 122">59 T.C. 122 (1972). Under this test, the major inquiry has been whether the structure provides "working space" for employees that is more than merely incidental to the primary function of that structure. Brown-Forman Distillers Corp. v. United States, supra;Catron v. Commissioner, 50 T.C. 306">50 T.C. 306, 311 (1968).In Yellow Freight System, Inc. v. United States, 538 F.2d 790 (8th Cir. 1976), however, the Eighth Circuit interpreted this regulation and the legislative history underlying the investment credit provisions as requiring a consideration of both the function and the appearance of the structure in question. Since an appeal in this case lies in the Eighth Circuit, 10 we will also apply the two-prong test adopted by that court. See Lesher v. Commissioner, supra.In terms of their physical appearance, petitioner's galvanizing facilities bear the unmistakable look of buildings. The structural 195 design, dimension, and physical attributes of these facilities are such that they closely resemble the examples of "buildings" listed in the regulations. Photographs in the record and the testimony of witnesses confirm this conclusion. Moreover, on brief, petitioner made no argument to the contrary. Accordingly, we hold for respondent on the "appearance test."1073 Respondent next contends that the structures also qualify as "buildings" under the function or use test. Respondent asserts that these facilities provided "working space" where petitioner's employees engaged in a broad range of activities directly related and highly essential to the operation of the galvanizing process.Petitioner contends that the work done by those employees was both insubstantial and insignificant in relation to its entire galvanizing operation. Relying principally upon Satrum v. Commissioner, supra, and Brown-Forman Distillers Corp. v. United States, supra, petitioner further argues that the employee activity within those two facilities involved nothing more than mere maintenance and collection of goods. Accordingly, petitioner concludes that these structures only served as storage or processing chambers 196 and did not furnish sufficient working space to constitute buildings for investment credit purposes. We disagree.In our view, the record clearly demonstrates that petitioner's galvanizing facilities provided the requisite "working space" to satisfy the functional test. We reach this conclusion based upon a consideration of both the quantity and nature of the employee activity within the two facilities. 11See Yellow Freight System, Inc. v. United States, supra at 796-797; Satrum v. Commissioner, supra at 417.Although the amount of human activity inside the galvanizing facilities did not approach the levels of either Yellow Freight System, Inc. v. United States, supra (a maximum of 80 full-time employees working approximately 1,925 man-hours per day), or Sunnyside Nurseries v. Commissioner, 59 T.C. 113 (1972) (approximately 50 employees working 5 days a week, 7 1/2 hours per day), we do not believe that there exists any minimum degree of activity, below which a structure 197 ceases to provide "working space." Instead, the proper inquiry is whether "a substantial number of employees were frequently and regularly occupied" in the facility. Sunnyside Nurseries v. Commissioner, supra at 121. This determination will necessarily depend upon the nature of the business venture housed within that structure.Applying this standard to the facts before us, we conclude that the quantum of employee activity in units 509 and 513 was 1074 sufficiently substantial to indicate that those structures provided working space. Since the galvanizing process was not automated, constant employee participation was required at each step of the operation. Thus, the crane operators, manually directing the craneway apparatus, transported products from the loading station through the processing tanks and finally to the post-production area. Various employees prepared the product for galvanizing while others, using hand-held tools, cleaned the newly treated metal. Still other employees, known as paddlers, skimmed excess zinc from the tops of the kettles. This frequent and regular employee activity was unlike the more limited activity in the cases cited by petitioner. Furthermore, the 198 fact that only 10 to 16 employees performed these functions does not change our result, for in the context of petitioner's galvanizing operation, that number was indeed "substantial." Accordingly, we reject petitioner's first contention that the amount of activity was de minimis.We must also reject petitioner's argument that the nature of the work performed by the employees was insignificant and thus comparable to the maintenance and collection of goods. The record clearly establishes that the metal products could not have been galvanized without the concerted efforts of those individuals. To be sure, some ancillary loading and maintenance work was necessarily involved. However, that activity was simply one aspect of the overall employee responsibility in the operation. Other duties, such as metal preparation, cleaning, and paddling were more directly and fundamentally related to the galvanizing process itself. Petitioner's attempt to downgrade the importance of those functions is, therefore, unpersuasive.Moreover, the cases relied on by petitioner do not support its position. In both Satrum v. Commissioner, supra, and Brown-Forman Distillers Corp. v. United States, supra, the 199 employee activity was merely supportive of and ancillary to the principal function of the structures involved therein. Here, on the other hand, the human activity was obviously essential to that function. Consequently, since it is clear that these galvanizing facilities provide "working space," we must hold that they functioned as buildings.Petitioner argues, however, that its galvanizing facilities were "special purpose structures" within the meaning of section 1.48-1(e)(1), 1075 Income Tax Regs., and, therefore, are exempted from the definition of "buildings." We cannot agree.In pertinent part, section 1.48-1(e)(1)(ii), Income Tax Regs., provides that the term building does not include --(ii) a structure which houses property used as an integral part of an activity specified in section 48(a)(1)(B)(i) if the use of the structure is so closely related to the use of such property that the structure clearly can be expected to be replaced when the property it initially houses is replaced. Factors which indicate that a structure is closely related to the use of the property it houses include the fact that the structure is specifically designed to provide for the stress and other demands 200 of such property and the fact that the structure could not be economically used for other purposes.A careful reading of the relevant legislative history clearly indicates that the kind of structure intended to qualify under this regulatory exception are those which are essentially "skin coverings" for the equipment and machinery which they house. S. Rept. 92-437, 92d Cong., 1st Sess. (1971), 1 C.B. 575">1972-1 C.B. 575; Endres Floral Co. v. United States, 450 F. Supp. 16">450 F. Supp. 16, 25 (N.D. Ohio 1977). The structures which satisfy this requirement are, in effect, mere extensions of that property and, consequently, are considered to be an integral part thereof for purposes of the investment credit. Examples of these mechanical-type structures are enumerated in the regulation. They include oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, coke ovens, brick kilns, and coal tipples.Petitioner advances three major arguments in support of its position. Petitioner initially contends that since both structures would be replaced at the time the galvanizing process was retired, the facilities fit squarely within the plain language and intended scope of this regulatory 201 exclusion. As a basis for this conclusion, petitioner points to the fact that when the galvanizing tanks in unit 509 were replaced in 1972, the roof and walls of that section were also replaced. Finding petitioner's reliance on that incident misplaced, we reject this first argument.The evidence fails to support petitioner's claim that it is reasonable to expect replacement of these structures if the machinery and equipment housed within were to be replaced. The temporary replacement of the roof and walls in unit 509 was simply a remedial measure taken to correct a then-existing acid fume problem and was not, as petitioner maintains, an inevitable consequence following its removal of the processing tanks. In 1076 addition, we note that petitioner subsequently covered the roof and walls with duraform and treated the steel framework with acid-resistant coating. Since that time those structural components have not been replaced nor has petitioner shown deterioration which would make future replacement likely. Accordingly, the acid problem which petitioner cites as causing the contemporaneous replacement of both structure and machinery in unit 509 no longer exists.Furthermore, respondent's 202 engineering expert, William Stewart, testified that units 509 and 513 contain equipment with useful lives significantly shorter than those of the structural elements. These items include heat instrumentation and control equipment, acid pumps, steel processing tanks, galvanizing kettles, and the furnace. Based upon this expert testimony, it is clear that those two structures need not be replaced when that equipment is eventually retired.Petitioner next argues that units 509 and 513 were "special purpose" structures because they could not be economically used for purposes other than zinc galvanizing. Petitioner's reasoning is as follows: (1) The size and location of the processing equipment would limit the available space necessary to support other manufacturing or production operations; (2) the costs and related problems involved in removing the concrete platform housing the galvanizing tanks would be prohibitive; and (3) the costs of heating and lighting the structures for "normal" manufacturing purposes would be substantial considering the excessive height of these structures.Disputing each of these claims, respondent maintains that it would be economically feasible to convert 203 units 509 and 513 to alternative uses. In this regard, respondent contends that the clear span construction of these facilities renders them particularly ideal for line production work. The open interior areas, respondent argues, could easily be adapted for other types of processing or manufacturing operations. Respondent further contends that the platform area could readily be removed from the facilities or, alternatively, boarded over and used for storage. Since we find these structures not restricted to their present function and believe that they can be economically adapted to other uses, we must hold for respondent.Petitioner has simply failed to offer any evidence supporting its assertion that these facilities are limited to the purposes for 1077 which they now serve. Notwithstanding the size and location of the concrete platform, these structures contain vast open areas which presently are used for loading and cleanup activities. In unit 513, for example, this nonprocessing area measures 200 feet by 79 feet and consists totally of flat, unobstructed floor space. Consequently, there is nothing which would prevent this area from being used as working space for any number of 204 activities.Moreover, the raised platform area itself can be adapted to alternative uses. In fact, during their 1978 inspection of unit 509, respondent's representatives discovered petitioner's employees preparing to utilize that platform for storage in an unrelated manufacturing business. Accordingly, since petitioner obviously believed that its facilities were suitable for other purposes, its contentions, on brief, to the contrary must be rejected.Petitioner's argument with respect to the economic cost of converting these facilities to alternative uses is also unpersuasive. While petitioner would undoubtedly incur some additional costs, there has been no showing that such a conversion would be economically unfeasible. Cf. Lesher v. Commissioner, supra; cf. Satrum v. Commissioner, supra.The structural layout of these facilities is such that the steel galvanizing tanks could be removed through the large doors without damaging the structural elements. Although the concrete tanks could not be removed, testimony supports that they could be easily demolished with a jackhammer or similar equipment. In this connection, William Stewart has stated that "it's cheaper to use common labor 205 to tear out something like that than it is to build a new building." Moreover, we find it highly significant that petitioner, in fact, removed the entire platform from unit 509 at the time of the reconstruction in 1972. Certainly, if it was possible to replace the platform in 1972, there is no reason to assume that future removal would be economically unfeasible.Petitioner's third major argument is that since units 509 and 513 were specially designed to provide for the stress and demand of the galvanizing process, they are, therefore, "special purpose" structures within the meaning of section 1.48-1(e)(1), Income Tax Regs. In support of this position, petitioner points to such special construction features as the duraform siding and roofing, the wood framework of unit 513, and the height of each enclosure. We find this argument unpersuasive.Petitioner has obviously failed to distinguish between a 1078 qualifying "special purpose structure" and a building designed for a specific use. To be sure, every manufacturing facility is, to some extent, specially designed to accommodate the nature of the process conducted within. Thus, walls, floors, and roofs may be of a specific dimension, 206 design, or construction. In the instant case, this is clearly illustrated by the use of acid-resistant materials to extend the useful lives of these structures. Such measures, however, do not necessarily transform a building into a "special purpose" structure. Instead, that term is far more limited in its meaning. Only those specially designed structures which are so integrally related to the equipment they house that they constitute mere coverings for that equipment qualify. Units 509 and 513 were not specifically designed simply to "cover" the galvanizing tanks and related equipment within those facilities. Thus, they are unlike storage bins, oil tanks, blast furnaces, and other regulatory examples of "special purpose" structures.For all of the reasons discussed herein, we hold that units 509 and 513 are "buildings" and, accordingly, deny petitioner's claimed investment credit.Issue 3. DepreciationThe next issue is whether petitioner is entitled to depreciate the reconstructed galvanizing enclosure of unit 509 and the entire structural enclosure of unit 513 using the double declining balance method. Petitioner argues that since these structures are "section 1245" property, they 207 can be depreciated under that accelerated method. Respondent contends that these structures constitute "section 1250" property for which double declining balance depreciation is unavailable. For the reasons set out below, we hold for respondent.As defined by section 1250(c), the term "section 1250 property" means any real property (other than section 1245 property) which is or has been property of a character subject to the allowance for depreciation provided by section 167. 12Section 1245(a)(3), moreover, specifically excludes buildings and their structural components from the definition of "section 1245 property." Furthermore, section 1.1245-3(c)(2), Income Tax 1079 Regs., provides that "building" is defined by reference to its meaning for investment credit purposes. Accordingly, since we have held these structures to be nonqualifying "buildings" under section 48, we conclude that they are also "section 1250 property."Having resolved this initial question, we must now decide the substantive depreciation issue. 208 Section 167(b)(2) generally permits a taxpayer to compute an allowance for depreciation using the double declining balance method. In the case of "section 1250 property," however, the availability of this accelerated method is substantially limited by section 167(j)(1). 13209 An exception to this limitation is contained in section 167(j)(3) which, in relevant part, provides as follows:Paragraph (1) of this subsection shall not apply, and subsection (b) shall apply, in the case of property --(A) the construction, reconstruction, or erection of which was begun before July 25, 1969 * Since unit 513 was constructed in 1972, it clearly does not fall within this exception. Accordingly, double declining balance depreciation cannot be taken on that structure. With respect to unit 509, petitioner originally constructed the galvanizing portion in 1966 and has depreciated that section using the double declining balance method. Respondent does not dispute the correctness of that action. In 1972, petitioner reconstructed that section and now seeks to depreciate the costs on the same accelerated method. The issue, therefore, 210 is whether 1080 we look to the pre-July 25, 1969, construction or the post-1969 reconstruction.In this regard, we note that the statutory provision and the regulations thereunder provide little insight. See sec. 1.167(j)-4, Income Tax Regs. Thus, one could possibly read that statute to allow double declining balance depreciation in this case because construction of the galvanizing portion began before July 25, 1969, even though reconstruction began after. We believe, however, that such an interpretation would be contrary to the legislative intent and could effectively nullify the depreciation limitations provided by section 167(j)(1). See H. Rept. 91-413 (1969), 3 C.B. 407">1969-3 C.B. 407; S. Rept. 91-552 (1969), 3 C.B. 557">1969-3 C.B. 557. Accordingly, since reconstruction began after the statutory focal date, we hold that petitioner cannot depreciate that section on a declining balance method. 14211 Petitioner can, however, continue to use that accelerated method with respect to the original construction costs of unit 509.Issue 4. Depreciation and Investment Credit on Zinc ChargeThe final issue is whether petitioner is entitled to depreciation and an investment credit on the initial zinc charges to the galvanizing kettles in units 509 and 513. Respondent argues that the zinc charge is not depreciable property nor does it have a useful life of more than 3 years for investment credit purposes. Instead, respondent claims that the zinc is an inventory item which is replenishable as used in the galvanizing process.Petitioner, on the other hand, argues that the zinc ceases to be inventory once it is placed in the galvanizing kettles. Accordingly, petitioner maintains that because the zinc is so integrally related to the galvanizing process, it should be considered part of the kettle itself and entitled to depreciation and investment credit on the same basis. We disagree.It is well-settled law that the section 167 allowance for depreciation does not apply to inventory or stock in trade. See, sec. 1.167(a)-2, Income Tax Regs.; Luhring Motor Co. v. Commissioner, 42 T.C. 732">42 T.C. 732, 751 (1964). Thus, the products manufactured and sold by petitioner 212 in the ordinary course of business are 1081 clearly nondepreciable items. Moreover, direct costs incident to the manufacture or processing of such items are includable in the "inventorial costs" of the products. See sec. 1.471-11(b)(2)(i), Income Tax Regs.In the instant case, the initial zinc was consumed in the ordinary course of the galvanizing process and became an integral part of the finished product. Being a direct inventory production cost, it constitutes nondepreciable property. Accordingly, it follows that the investment credit with respect to the zinc is also denied. See sec. 48(a)(1). 15To reflect the foregoing,Decision will be entered under Rule 155. Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as amended.2. The record does not indicate the addition to the bad debt reserve for 1975.3. The record does not indicate the balance in the reserve account at the end of 1975.↩4. The formula is derived from Black Motor Co. v. Commissioner, 41 B.T.A. 300">41 B.T.A. 300 (1940), affd. 125 F.2d 977">125 F.2d 977↩ (6th Cir. 1942), on another issue.5. Corrected for prior year adjustment: $ 120,000 - 74,011 = $ 45,989.6. Petitioner also claimed an investment credit on the process tanks and other galvanizing equipment within those facilities. These items, however, are not in dispute.↩7. The validity of this formula has been upheld by the Supreme Court. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522↩ (1979).8. On brief, petitioner admitted that the evidence introduced at trial related solely to fiscal 1974. Since petitioner obviously failed to prove any abuse of discretion with respect to fiscal 1973, we must sustain respondent's determination for that year.↩9. SEC. 38. INVESTMENT IN CERTAIN DEPRECIABLE PROPERTY.(a) General Rule. -- There shall be allowed, as a credit against the tax imposed by this chapter, the amount determined under subpart B of this part.(b) Regulations. -- The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this part and subpart B.↩10. Sec. 7482(b)(1)(B).↩11. Compare Thirup v. Commissioner, 508 F.2d 915">508 F.2d 915, 919 (9th Cir. 1974), revg. 59 T.C. 122">59 T.C. 122↩ (1972), in which the Ninth Circuit looked solely to the nature of the employee activity rather than the amount of such activity.12. Sec. 167(a)↩ allows as a deduction a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business or held for the production of income.13. SEC. 167. DEPRECIATION.(j) Special Rules for Section 1250 Property. -- (1) General rule. -- Except as provided in paragraphs (2) and (3), in the case of section 1250 property, subsection (b) shall not apply and the term "reasonable allowance" as used in subsection (a) shall include an allowance computed in accordance with regulations prescribed by the Secretary, or his delegate, under any of the following methods: (A) the straight line method,(B) the declining balance method, using a rate not exceeding 150 percent of the rate which would have been used had the annual allowance been computed under the method described in subparagraph (A), or(C) any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with the taxpayer's use of the property and including the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in subparagraph (B).↩Nothing in this paragraph shall be construed to limit or reduce the allowance otherwise allowable under subsection (a) except where allowable solely by reason of paragraph (2), (3), or (4) of subsection (b).14. In the notice of deficiency, respondent determined that the useful life of the galvanizing enclosure was 25 years. Respondent subsequently stipulated, however, that this useful life was only 15 years. Consequently, a Rule 155 computation will be necessary.15. Since 20 percent of the zinc is replaced every month, it is clear that the useful life of the initial zinc charge was less than 1 year. Consequently, depreciation and investment credit on such property is not allowable in any event.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/1835370/	304 So. 2d 410 (1973) Jack PENTON, Plaintiff-Appellee, v. BUDGET RENT-A-CAR OF LOUISIANA, INC., et al., Defendants-Appellants. CONTINENTAL CASUALTY COMPANY and Budget Rent-A-Car of Louisiana, Inc., Plaintiffs-Appellees, v. FORD MOTOR COMPANY and Jack Penton, Defendants-Appellants. Nos. 9470, 9471. Court of Appeal of Louisiana, First Circuit. August 28, 1973. On Rehearing December 17, 1973. 411 L. Michael Cooper and Wallace A. Hunter, Baton Rouge, for Ford Motor & Ins. Co. of North America. Bruce Waters, Baton Rouge, for plaintiff-appellee Penton (9470) and defendant-appellee Penton (9471). Gerald L. Walter, Jr., Baton Rouge, for defendant Robinson Bros. Carey Guglielmo, Baton Rouge, for defendant-appellee Budget Rent-A-Car of La. (9470) and plaintiff-appellee Continental Casualty (9471). Before LANDRY, TUCKER and PICKETT, JJ. Before LANDRY, TUCKER and PICKETT, JJ. 412 PICKETT, Judge. These consolidated cases arose out of a one car accident which occurred at approximately 2:30 P.M., on November 5, 1967, on Louisiana Highway 37 (Greenwell Springs Road), near Baywood, Louisiana. The automobile involved was a 1967 Mercury 4 door automobile owned by Budget Rent-A-Car of Louisiana, Inc. (Budget) and being operated by Jack Penton. At the time of the accident the Mercury automobile was under lease to Penton from Budget. As a result of this accident, two suits were filed. Suit Number 9,470 was instituted by Jack Penton for damages resulting from personal injuries against Budget, the owner of the 1967 Mercury automobile, Ford Motor Company (Ford), the manufacturer thereof, Insurance Company of North America, the insurer of Ford, and Robinson Brothers, Inc., (Robinson), the vendor of said automobile. In suit Number 9,471, Continental Casualty Company (Continental), the collision insurer of the 1967 Mercury automobile, and Budget filed suit against Ford and Jack Penton to recover the property damages allegedly sustained to the said automobile. On May 23, 1970, summary judgment was rendered in favor of Robinson in Suit No. 9,471 dismissing it from the suit. Both suits were tried on the merits against the remaining defendants on February 9, 1972. In Suit No. 9,470 judgment was rendered in favor of Jack Penton and against Ford, Insurance Company of North America, and Budget, for the principal sum of $3,083.00, together with legal interest from judicial demand, and cost. In suit No. 9,471, judgment was rendered in favor on Continental and against Ford for the principal sum of $1,237.79 together with legal interest thereon from judicial demand until paid; and in favor of Budget and against Ford in the principal sum of $250.00 together with legal interest thereon from judicial demand until paid. Ford was taxed for all cost in said cause. In Suit No. 9,470, the defendants, Budget, Ford, and Insurance Company of North America, have appealed. Jack Penton has answered the appeal seeking an increase in the quantum of damages awarded him in said judgment. In Suit No. 9,471, the defendant, Ford has appealed suspensively. The plaintiff, Jack Penton, testified that on Sunday afternoon, November 5, 1967, he rented a 1967 Mercury automobile from Budget, in Baton Rouge, Louisiana, for the purpose of going to Jackson, Mississippi, in order to pick up his wife. Mr. Penton entered into a written lease agreement with Budget under the terms of which Mr. Penton agreed to pay the sum specified in the lease agreement and Budget agreed to provide a vehicle suitable for the intended use. The said agreement, which has been filed in evidence, shows that the speedometer of the vehicle rented by Mr. Penton registered 9,283 miles, at the time he rented it. Mr. Penton left Baton Rouge in the rented automobile by way of Louisiana Highway 37 (the Greenwell Springs Road); and after traveling some fifteen or twenty miles, he reached a rather straight portion of the highway, and while traveling about forty-five miles per hour, he saw a large dog about one hundred yards ahead. As he approached the dog, it attempted to cross the road. Mr. Penton at first applied his brakes lightly and the vehicle seemed to veer to the left. Then he applied his brakes hard, in an effort to avoid striking the dog; and the automobile suddenly went out of control, spun around and came to rest upside down, facing in the direction from which it had come, in a drainage ditch on the south, or right side of the road. As a result of the accident, Mr. Penton suffered personal injuries, for which he seeks to recover damages. Mr. Penton alleges the accident was caused by the defective braking system of the vehicle. The accident was investigated by State Trooper W. H. Seals, whose report was filed in evidence by stipulation of counsel, because Trooper Seals was not available to testify. It was stipulated that if Trooper Seals were called to testify that he would testify in accordance with the 413 report prepared by him. In support of his claim that the braking assembly on the Mercury was defective, the plaintiff, Jack Penton, testified that he observed that only one skid mark was made by the vehicle after the brakes were applied. The said Trooper Seals called his attention to the single skid mark. Mr. Penton's testimony on that point is supported by a notation of Trooper Seals' report which shows that Mercury laid down 171 feet of skid mark, and contains the statement; "Only left front brakes held causing vehicle to pull to left. Driver overcorrected to right and vehicle spun around and flipped over in ditch." We are convinced the evidence adduced in the trial of this case shows conclusively that the right front brake assembly of the 1967 Mercury was defective, at the time of the accident. The wrecked vehicle was towed in to Robinson's body shop; and after the body was repaired, it was moved to Robinson's service repair shop, either the same day it left the body shop, or soon thereafter because of a brake problem. Mr. John W. Mister, the service manager of Robinson's repair shop, testified that when the vehicle was brought into the repair shop he drove it and found there did exist a problem with the brakes. The brake assembly of each front wheel was examined. It was found that the left front brake needed no adjustment or repairs, and it was reassembled. But with reference to the right front brake, Mr. Mister said: "Well, we found that the right front brake, the lining bad, might say worn itself out or, anyway, the lining had destroyed itself from off the shoes, and we had shoe to drum contact, with is iron to iron, metal, and that's what had happened." The car was still under warranty, and Mr. Mister assumed that the repairs would be paid for by Ford. Therefore, he caused the worn parts of the right brake assembly to be placed in a box to be sent to Ford. However, Mr. Robert Dutschke, The President and General Manager of the Baton Rouge Office of Budget, obtained the discarded parts of the brake assembly and turned them over to Mr. Jack B. Elstrott, a representative of Budget's insurer. The evidence shows that the brake parts were subsequently sent to Ford, and that later Ford returned them, and they were physically in the courtroom at the trial of this case. Mr. Penton introduced the expert testimony of Dr. Gerald Whitehouse, a professor of mechanical engineering at Louisiana State University. Dr. Whitehouse confirmed the fact that the right front brake assembly of the Mercury was badly deteriorated; in fact, much more so than would be expected from normal wear. He expressed the opinion that under normal driving conditions the brakes should have lasted for 25,000 to 30,000 miles; he found that this particular brake assembly had worn enough to produce metal to metal contact between the brake shoes and the drum after only approximately 9,000 miles of driving. After a careful review of the evidence, we concur in the conclusion of the trial judge that the badly deteriorated condition of the right front wheel brake assembly was the cause of the accident. In order to fix the responsibility for Mr. Penton's accident, it is important to determine the cause of the defective brake system. Dr. Whitehouse, the expert witness for the plaintiff, Jack Penton, commented relative to the defective brake assembly as follows: "Given, that the system has not been in any way manually changed by a person then the system could have two or three possible ways that the wear could be accelerated; one of these is strictly materials. Let's say that the molded asbestos covering on the shoes were put on there faulty, that the material wasn't of sufficient quality to withstand the higher temperatures during the braking. That is a possibility. Another possibility might be that the braking device, the 414 actual hydraulic cylinder, would maintain the departures in the extended positions and not return to the normal positions due to something obstructing the position behind the pistons. This is a possibility. One of the possibilities is that the adjusting mechanism could have been assembled wrong. This is a possibility. I think that there are two or three, aside from manual, which you hypothetically said if there has been no manual correction or no manual adjustment to this braking system, that we come back to two or three possibilities that could occur causing the accelerated wear." Dr. Whitehouse stated it was impossible to determine the original quality of the asbestos lining of the brake shoes because the remaining fragments of the lining had been subjected to such heat that an analysis of the original texture could not be made. However, the brake assembly on each of the other three wheels indicated normal wear. Hence, it appears unlikely that the excessive deterioration of the left front brake assembly was due to the inferior quality of the material. There is no evidence that anyone had tampered with the hydraulic brake cylinder, or that it had malfunctioned. Dr. Whitehouse's testimony indicated that if the rapid deterioration of the asbestos brake lining of the right front brake assembly was not due to inferior material, or the malfunctioning of the hydraulic cylinder, then it was because the brake shoes had been too tightly adjusted, either manually or automatically. Dr. Whitehouse explained that the adjustment of the brakes shoes on the Mercury involved herein is made by means of an adjusting screw. The tightening or loosening of the adjusting screw causes the brake shoes which are lined with asbestos to move either closer to, or farther from, the drum, depending on the direction the adjusting screw is turned. The braking system of the Mercury was equipped with a self adjusting device, the mechanism of which Dr. Whitehouse explained in great detail. He said the only way the brakes can be tightened is by turning the adjusting screw either manually or by the automatic adjusting device. There is no evidence that the braking system had been manually adjusted at any time. To the contrary, Mr. Dutschke testified positively that relying on his memory and such records as Budget had with reference to the Mercury, it had never had any maintenance or repair work of any kind done on it prior to November 5, 1967. The evidence shows that Robinson did all of Budget's repair and maintenance work. Mr. John W. Mister, Robinson's service shop manager, said Robinson had no record of any repair work done on the Mercury. Assuming the brakes had not been tampered with manually, Dr. Whitehouse opined that the brakes were tightened by the automatic adjusting device. He explained that normally the adjusting mechanism automatically turns the adjusting screw and tightens the brake shoes when the brakes are applied while the vehicle is backing. In the normal use of an automobile, it is operated in reverse frequently enough to automatically tighten the brakes sufficiently. Dr. Whitehouse expressed the opinion that the automatic adjusting device on the Mercury was installed in such manner that it caused the adjusting screw to tighten the right front brake shoes, when the brakes were applied while the Mercury was traveling in a forward direction. In further support of his opinion, he pointed out that this particular adjusting screw was damaged when it was being loosened, probably when the mechanic disassembled the braking assembly. The fact that the adjusting screw was damaged indicated that the mechanic had difficulty in loosening it. All of which supported his opinion that the automatic adjusting device was improperly installed so that it caused the adjusting screw to tighten the brake shoes when the brakes were applied while the vehicle was moving forward, instead of backwards. 415 The defendant, Ford, has complained the parts of the brake system examined by Dr. Whitehouse and physically exhibited in the trial of the case were not identified as the parts taken from the right front brake assembly of the Mercury. Mr. Mister testified that the brake system was disassembled under his supervision; and the parts, consisting of two brake shoes, a brake drum, an adjusting screw and one selfadjusting cable, removed from the vehicle, were turned over to Mr. Dutschke, who gave them to Mr. Jack B. Elstrott, the claims supervisor for Robinson's insurer. The parts were subsequently photographed, and turned over to Ford; and Ford ultimately returned them. Although some of the witnesses did not identify the brake parts, the Trial Court obviously believed they were the identical parts removed from the Mercury. The Trial Judge held that the facts of this case justified the application of the doctrine of res ipsa loquitur; and that Ford was liable for the damages caused by the accident. Counsel for Ford and its insurer argue strenuously that the Trial Judge erred in applying the doctrine of res ipsa loquitur to the facts in this case so as to render Ford liable for the damages sustained. The rule of res ipsa loquitur is stated in 45 C.J., paragraph 768, at page 1193, as follows: "Where the thing which caused the injury complained of is shown to be under the management of defendant or his servants and the accident is such as in the ordinary course of things does not happen if those who have its management or control use proper care, it affords reasonable evidence, in the absence of explanation by defendant, that the accident arose from want of care. This statement of the rule of res ipsa loquitur, based on the expression in an Early English case, which has been widely quoted with approval, has been in substance most frequently adopted and applied in subsequent decisions so that the occurrence of an injury under the circumstances therein set forth raises a presumption or permits an inference that the party charged was guilty of negligence." The application of the doctrine of res ipsa loquitur is aptly expressed on page 543 of 37 Words and Phrases, Permanent Edition, as follows: "The application of the doctrine of `res ipsa loquitur' permits the trier of fact, in absence of evidence of specific acts of negligence, to reason from the result back to the cause, that is, to infer fault on the part of the person having control of some instrumentality from the failure of its operation to terminate in a safe or proper result when ordinarily a safe and proper result follows the exercise of care. Johnson v. Colp, 300 N.W. 791, 792, 211 Minn. 245." In Lutheran Church of Good Shepherd v. Canfield, 233 So. 2d 331, this Court said: "It is settled in our law that the doctrine of res ipsa loquitur applies only when the instrumentality alleged to have caused the damage is in the actual or constructive control of the defendant, or where plaintiff has proved freedom of fault on the part of all through whose hands the instrumentality passed after leaving defendant" (Emphasis supplied.) Dr. Whitehouse expressed the opinion that the accelerated wearing of the right front brake assembly was due to the brake assembly having been adjusted too tightly, either manually or by the automatic adjusting device. Assuming the brake assembly was not adjusted manually, then the tightening of the brake had to be made by the automatic adjusting device. Dr. Whitehouse explained that if the undue tightening of the brake assembly was made by the automatic adjusting mechanism, it could only result from the improper installation of the brake assembly. The evidence discloses that the Mercury automobile was sold by Robinson, 416 Ford's authorized representative, to Budget. Robinson denied having made any adjustments to the brakes on the vehicle prior to the accident. Budget denied having tampered with the brakes in any way and submitted evidence that the vehicle was serviced only at the Johnny Rogers Esso Station, and that such service did not include any repairs or brake adjustments. It is our opinion that the plaintiff, Jack Penton, has proved in every way available to him that no one through whose hands the vehicle passed after leaving Ford caused the brakes at any time to be manually adjusted. Therefore, we concur in the finding of the Trial Court that the plaintiff has made out a prima facie case of negligence against Ford so that the doctrine of res ipsa loquitur is applicable. Ford has not submitted any evidence to overcome the presumption of negligence on its part. It is true, as argued by counsel for Ford that there was the possibility of the brake assembly having been manually adjusted. But that is mere speculation; and not sufficient to overcome the presumption of negligence on the part of Ford. Counsel for Ford has plead the contributory negligence of the plaintiff, Jack Penton. The Trial Court, in his written reasons for judgment, stated: "In spite of testimony that indicates he (Jack Penton) may have had some warning of the impending failure of the brakes, because of a slight pulling to the left, this Court feels that this would not be enough to adequately warn him that such a failure as occurred was imminent. Also, despite implications that he may have lost control of the automobile through his own miscalculation, it seems apparent that any man faced with that situation would fare no better than Mr. Penton did. Thus it is the finding of this Court that Ford Motor Company was negligent toward Jack Penton, and that negligence was the sole proximate cause of his injury." We concur in the conclusion of the Trial Court that Mr. Penton was not contributorily negligent and that the negligence of Ford was the sole proximate cause of the accident and of Mr. Penton's injuries. The plaintiff, Jack Penton, contends that irrespective of the latent defect or malfunction of the Mercury automobile, rented from Budget, that Budget and its insurer are liable to him under the provisions of Louisiana Revised Civil Code Article 2695, which reads as follows: "The lessor guarantees the lessee against all the vices and defects of the thing, which may prevent its being used even in case it should appear he knew nothing of the existence of such vices and defects, at the time the lease was made, and even if they have arisen since, provided they do not arise from the fault of the lessee; and if any loss should result to the lessee from the vices and defects, the lessor shall be bound to indemnify him for the same." In the case of Aetna Insurance Company v. Guidry, 216 So. 2d 859, the Court held that where a lessee suffers loss resulting from a defect in the thing leased, he may recover damage from the lessor regardless of lessor's ignorance of such defect or the latency thereof. In that case the court said: "Jurisprudence interpreting this article makes it clear that where the lessee suffers loss, resulting from a defect in the thing leased, he may recover damages from the lessor regardless of the lessor's ignorance of the defect or latency thereof. The lessor in not an insurer against injuries caused by the thing leased, but he is liable where the lessee proves the existence of a defect which caused the injury. Nickens v. McGehee, 184 So. 2d 271 (1st Cir. La.App. 1966.)" We concur in the conclusion of the Trial Court in finding that the defendant 417 Budget is liable to Mr. Penton under the lease contract. The Trial Judge in his written reasons for judgment appropriately said: "As to the defendant Budget Rent-A-Car, this Court can find no evidence of negligence. The defect present in the car was of such a nature that only a special and rigorous inspection would have revealed it. Since there was apparently no indication of any brake problem before Mr. Penton drove the car, this Court must hold that Budget met the standard of care under the circumstances, and this was not negligent. However, Budget was under a higher duty to Mr. Penton, that of a lessor. According to Civil Code Article 2695, a lessor must indemnify a lessee for loss or injury resulting from defects in the leased object, even though the lessor has no knowledge of those defects. Because sufficient facts were brought forward at trial to prove the existence of a defect and to show that the defect caused injury to Mr. Penton, and because the lease agreement was introduced at trial without objection, this Court must hold that the defendant Budget Rent-A-Car is liable to Mr. Penton under the lease contract." Mr. Penton testified that the accident shook him up quite severely. His left leg and left shoulder were bruised and caused him considerable pain. He stated that his left leg recovered and no longer bothers him. But he has never recovered from his shoulder injury. His shoulder bothers him more in the winter than at any other time; but that because of the kind of work he does (he is a pipe fitter) he necessarily has to use his arm a lot and that after working all day it becomes sore and stiff. Dr. Allan Jackson, an orthopedic specialist, examined Mr. Penton soon after the accident. He found a large bruise on the left thigh and soreness in the left shoulder. X-rays disclosed no fractures or other abnormality. He recommended that Mr. Penton remain away from his work for one week and that he then return to him for follow up examination. Mr. Penton returned on November 14, 1967 for an examination, and Dr. Jackson found him greatly improved. However, he still had the large bruised area on the left thigh. He found little or no change in Mr. Penton's left shoulder. He released Mr. Penton to return to his work. On subsequent examinations he found that Mr. Penton suffered from bursitis in his left shoulder. He stated that the bursitis could have very well resulted from the injury sustained in the automobile accident. But not having seen Mr. Penton prior to the accident, Dr. Jackson could not say with certainty that the bursitis was casually connected with the injuries sustained in the accident. The trial court awarded Mr. Penton $3,000.00 for his injuries and the accompanying pain and suffering and $83.00 for medical expenses. The Trial Judge having seen Mr. Penton and having heard him testify, as well as having heard the evidence of the treating physician, we cannot say that he abused his "much discretion", or that the award is either inadequate or excessive. For the reasons set forth in Suit No. 9,470, we concur in the finding of facts, and the award for damages made by the Trial Judge, in Cause No. 9,471, as explained in his written reasons for judgment, in which he said: "In Suit No. 130,482, the plaintiff Continental Casualty Company, subrogee of the plaintiff, Budget Rent-A-Car, is seeking recovery of $1,237.79 paid by it to Budget under a contract of insurance. The Plaintiff, Budget Rent-A-Car, is seeking recovery of its deductible, $250.00. Since this Court has determined in the companion case that the primary responsibility for the defective brake assembly lies with Ford Motor Company, it is the decision of this Court that Ford Motor Company has violated its sales warranty and thus is responsible for the loss insured by Budget and its subrogee, 418 the Continental Casualty Company. The defendant, Jack Penton, is free from negligence." Accordingly, for the above and foregoing reasons, the judgments appealed are affirmed at appellants' costs. Affirmed. TUCKER, J., takes no part. ON REHEARING PICKETT, Judge. In our original opinion we affirmed the judgment of the lower court, wherein that court held the defendant, Ford Motor Company (Ford), at fault in an automobile accident caused by the malfunctioning of the brake assembly of the right front wheel of a 1967 Mercury automobile which was manufactured, assembled and sold by Ford. Defendants, Ford and its insurer, Insurance Company of North America, applied for a rehearing on the ground that we erred in affirming the judgment of the lower court which was based solely on the doctrine of res ipsa loquitur applied to an incorrect factual determination. After a careful review and evaluation of the evidence in the record, we have concluded that we were in error in basing Ford's liability on negligence, or that the doctrine of res ipsa loquitur was applicable. However, we concluded that the accident was due to a malfunction of the brake assembly in the right front wheel of the vehicle involved in the accident. Ford designed, manufactured and installed that brake assembly. Hence, Ford is responsible if there was either faulty design, defective material, or improper installation of the brake mechanism, the malfunctioning of which caused the accident. The applicable rule of the liability of a manufacturer in a products liability case is set out in Meche v. Farmers Drier & Storage Company, La.App., 193 So. 2d 807, as follows: "A manufacturer or seller of a product which involves a risk of injury to the user is liable to any person whether the purchaser or a third person, who without fault on his part sustains an injury caused by a defect in the design or manufacture of the article, if the injury might have been reasonably anticipated. Smith v. New Orleans & Northeastern Railroad Co., La.App. 1 Cir., 153 So. 2d 533; Samaha v. Southern Rambler Sales, Inc., La.App. 4 Cir., 146 So. 2d 29; Restatement of Torts 2d, Section 402 (A); Prosser, The Law of Torts, Chapter 19 (3d ed., 1964); 65 C.J.S. Negligence § 100(2). Cf. also: Percy, Products LiabilityTort or Contract or What?, 40 Tul.L.Rev. 715 (1966); Note, Torts-Strict Liability of the Manufacturer, 23 La.L.Rev. 810 (1963)." We adhere to our original opinion that the badly deteriorated condition of the right front wheel brake assembly was the cause of the accident. We agree with the applicants that the evidence fails to show that the brake assembly was made of inferior material, or that there was any defect in the design or manufacture of the brake mechanism. Based on the evidence of Dr. Gerald Whitehouse, plaintiff's expert witness, the excessive wearing of the brake shoes' lining was due to the brake shoes having been adjusted too tightly. In fact, the applicants agree with this conclusion. In their application for a rehearing, they said: "Defendants will assume for the purpose of this application that the occurrence of the accident was due solely to a malfunction in the right front brake assembly. The evidence is clear that the malfunction occurred because the brake shoes were improperly adjusted too closely to the brake drum, thus causing the asbestos lining to wear inordinately fast. *419 The issue is thus why the improper adjustment occurred causing the rapid wear to the right front brake shoes." Dr. Whitehouse expressed the opinion that the accelerated wearing of the right front brake assembly was due to the brake assembly having been adjusted too tightly, either manually or by the automatic adjusting device. To render Ford liable in this case, it is necessary that the plaintiff show circumstances that leave no room for a presumption other than the improper installation by Ford of the right front brake system on the Mercury was the proximate cause of its deterioration. The plaintiff produced evidence that discloses that the vehicle in question was sold by Ford's authorized agent, Robinson, to Budget; and that neither Robinson, nor Budget, tampered with the brake system. But Budget rented the Mercury to various persons whose identities are not revealed; and the Mercury was used by the employees of Budget, none of whom testified except Mr. Dutschke. It had been driven in excess of 9,000 miles. The evidence shows that the brakes could have been tightened by anyone who could use a screw driver. The plaintiff made no attempt to show freedom from fault on the part of any parties who had actual temporary possession of the vehicle, except Robinson and Budget. Plaintiff's own witness, Dr. Whitehouse, has said the tightening of the brake shoes of the Mercury could have happened in either of two ways; that is, they could have been manually tightened, or the tightening could have been caused by the improper installation of the braking system. The plaintiff had the burden of showing that Ford was responsible for the deteriorated condition of the brake assembly that caused the accident. The plaintiff has failed to show by a legal preponderance of the evidence that Ford was responsible for the accident. Therefore, the demands against Ford must be rejected. For the reasons assigned, the judgment of the district court casting the defendants, Ford Motor Company and the Insurance Company of North America, is overruled and reversed, and the original judgment of this court casting said defendants is recalled and set aside, and the demands against said defendants rejected, at plaintiffs' costs. Except as amended, our original judgment is affirmed. Amended and affirmed.	01-04-2023	10-30-2013
https://www.courtlistener.com/api/rest/v3/opinions/4620884/	NEW ORLEANS LAND COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.New Orleans Land Co. v. CommissionerDocket No. 48003.United States Board of Tax Appeals29 B.T.A. 35; 1933 BTA LEXIS 1014; September 14, 1933, Promulgated 1014 Held, that in the circumstances herein the city of New Orleans owed no money to petitioner at any time material to the issue in controversy and that no payment made to petitioner was interest on an obligation of such city. Arthur A, Moreno, Esq., for the petitioner. Warren F. Wattles, Esq., for the respondent. LANSDON 35 OPINION. LANSDON: The respondent has determined a deficiency in income tax for the year 1927, in the amount of $39,528.90. The only issue is whether certain amounts received by the petitioner in the taxable year represented interest on obligations of the city of New Orleans and so were exempt from Federal income tax under the provisions of section 213 of the Revenue Act of 1926. 1 The facts are not in dispute and are stipulated as follows: That the New Orleans Land Company was the owner of a certain tract of land located in the city of New Orleans, and that on November 24, 1925, the New Orleans Land Company entered into an agreement with the city of New Orleans; It is further stipulated that on February 2, 1926, by act before Robert Legier, Notary Public in and for the Parish of Orleans, the New Orleans Land Company1015 transferred to the City of New Orleans the land described as Tract No. 1 for the recited consideration of $200,000; That on February 2, 1927, by act before Robert Legier, Notary Public in and for the Parish of Orleans, the New Orleans Land Company transferred to the city of New Orleans the land described as Tract No. 2, for the recited consideration of $212,000; That on December 16, 1927, by act before Robert Legier, Notary Public in and for the Parish of Orleans, the New Orleans Land Company transferred to the city of New Orleans, the land described as Tracts Nos. 3, 4, 5, 6, 7, 8, 9, and 10 for the recited consideration of $1,750,266.66; That all of these transfers were made in accordance with the rights and obligations in the agreement entered into between the city of New Orleans and the New Orleans Land Company on November 24, 1925; 36 That the New Orleans Land Company, in making its income return for the year 1927, did not return the sum of $192,266.66, which it calculated or claimed as interest and as exempt income under the terms of the agreement of November 24, 1925; that if no part of the sum or sums received by the petitioner upon the transfer of Tracts Nos. 1016 2 to 10, inclusive, is interest within the meaning of the Revenue Acts and exempt income under the law, then there is due an additional tax of $39,528.90 from this petitioner for the year in issue. The contract of sale, attached to the stipulation as Exhibit A, contains the following provisions which are material to the issue here: This agreement made this 24th day of November, 1925, by and between the City of New Orleans, represented herein1017 by Martin Behrman, its Mayor, hereinafter called the "Purchaser", party of the first part, and the New Orleans Land Company, of New Orleans, Louisiana, represented herein by George Dendinger, its President, hereinafter called the "Vendor", party of the second part: WITNESSETH: Paragraph One. The party of the second part does hereby agree to sell to the party of the first part, who agrees to buy for the price of Two Hundred Thousand Dollars ($200,000) to be paid simultaneously with the signing of the deed, on or before February 1, 1926, the lands mentioned and described as Tract No. 1 on the plan annexed hereto and made a part hereof as Exhibit A, which plan has been signed by the parties hereto for identification herewith, and which land is more particularly described as follows: * * * Paragraph Two. For and in consideration of the purchase of the land mentioned and described in Paragraph One hereof, and only in the event said land has been actually paid for on or before February 1st, 1926, as provided for in Paragraph One, an option is hereby granted by the party of the second part to the party of the first part to purchase on or before February 1, 1927, for the sum and1018 price of Two Hundred Thousand Dollars ($200,000) with six per cent interest thereon from February 1, 1926, the land mentioned and described as Tract No. 2, of the plan annexed to and made a part of this agreement as Exhibit A, which land is more particularly described as follows: * * Paragraphs 3, 4, 5, 6, 7, 8, 9, and 10 are similar to 1 and 2. Paragraphs 11 and 12 are as follows: Paragraph Eleven. The ten (10) tracts of ground hereinabove mentioned and described are located in the City of New Orleans and are bounded on the north by a line Four Hundred (400) ft. north of and parallel to Adams Avenue, on the west by Orleans Blvd., on the south by Taylor Avenue and on the east by Bayou St. John, as per sketch and map attached hereto and made a part thereof. Paragraph Twelve. It is understood and agreed that the party of the first part shall have the right, at any time after Tract No. 1 has been purchased and paid for, to exercise in numerial order the options hereinabove given, by giving Sixty (60) days' written notice and paying to the party of the second part simultaneously with the signing of the deed the sum of Two Hundred Thousand Dollars ($200,000) with six per cent1019 interest from February 1, 1926, for each tract of land conveyed. * * The 37 deed transferring title from the petitioner to the city of New Orleans of tract No. 1, attached to the stipulation as Exhibit B, after the recitation of formal matters and terms, includes the following: Who [president of petitioner] declared that in consideration of the sum and price hereinafter mentioned, he does by these presents, grant, bargain, sell, convey, transfer, assign, abandon, deliver and set over without any warranty whatsoever, insofar as the land involved in the suit entitled "State of Louisiana versus New Orleans Land Company, No. of the Docket of the Civil District Court for the Parish of Orleans", even as to the restitution of purchase price but with lawful warranty, however, limited as to the restitution of the purchase price as to all other portions and with full substitution and subrogation to all the rights and actions of warranty which the New Orleans Land Company has or may have against all former vendors, unto * * This sale is made and accepted for and in consideration of the sum of Two hundred Thousand Dollars, cash, which the vendor acknowledges to have received1020 from the purchaser and for which full acquittance and discharge is hereby granted. The deed transferring title to tract No. 2 from the petitioner to the city of New Orleans, after formal recitals, contains the following: * * Who [president of petitioner] declared that in consideration of the sum and price hereinafter mentioned, he does by these presents, grant, bargain, sell, convey, tansfer, assign, abandon, deliver and set over with lawful warranty and with full substitution and subrogation to all the rights and actions of warranty which the New Orleans Land Company has or may have against all former vendors, unto * * * A CERTAIN TRACT OF LAND, situated in the Second District of the City of New Orleans, being Tract No. 2, lying immediately adjacent to and west of Tract No. 1, which tract No. 1 is fully described in the deed from the New Orleans Land Company to the City of New Orleans, passed before Robert Legier, Notary Public, on the second day of the Month of February, in the year 1926, said Tract No. 2 being more particularly described as follows: * * * This sale is made and accepted for and in consideration of the sum of Two Hundred and Twelve Thousand Dollars1021 ($212,000) cash, which the vendor acknowledges to have received from the purchaser and for which full acquitance and discharge is hereby granted. By reference to the hereto annexed certificates from the Register of Conveyances and Recorder of Mortgages, it does not appear that said vendor has previously alienated said property or that same is encumbered with any mortgages Whatsoever. * * The deed transferring title to tracts nos. 3, 4, 5, 6, 7, 8, 9, and 10 from the petitioner to the city of New Orleans, excluding formal recitals and descriptions, contains the following: Who [president of petitioner] declared, that in consideration of the sum and price hereinafter mentioned, he does by these presents, grant, bargain, sell, 38 convey, transfer, assign, abandon, deliver and set over with lawful warranty and with full substitution and subrogation to all the rights and actions of warranty which the New Orleans Land Company has or may have against all former vendors, unto * * This sale is made and accepted for and in consideration of the sum of One Million, Seven Hundred Fifty Thousand, Two Hundred Sixty-six and 66/100 Dollars ($1,750,266.66) Cash, which the1022 vendor acknowledges to have received form the purchaser and for which full acquittance and discharge is hereby granted. Upon audit of petitioner's income tax return for the taxable year, the respondent disallowed petitioner's claim that the amount of $192,226.66 represented interest on obligations of the city of New Orleans, added such amount to petitioner's gross income for that year and determined the deficiency here in controversy. The petitioner is a Louisiana corporation, with its principal office at New Orleans. Its sole contention here is that the amount of $192,266.66 received, as claimed by it, as interest on obligations of the city of New Orleans is exempt from taxation under the provisions of section 213(b)(4) of the Revenue Act of 1926. Apparently this contention is based on the theory that the agreement incorporated in the stipulation as Exhibit A was a contract under which the city of New Orleans purchased, or agreed to purchase, the entire tract of 2,000 acres here involved. Careful study of the agreement and of the deeds conveying title to the successive tracts, as finally purchased and paid for by the city of New Orleans, does not sustain the claim of petitioner. 1023 Paragraph "One" of the agreement provides for the sale of tract No. 1, on or before February 1, 1926, for $200,000 in cash. Upon the accomplishment of that transaction, the city of New Orleans acquired an option to purchase tract No. 2 at any time before February 1, 1927, for $200,000, with 6 percent interest thereon from February 6, 1926, but was under no enforceable obligation to make that purchase. The deed transferring tract No. 2 recites that "This sale is made and accepted for and in consideration of the sum of $212,000, cash." Similarly, the deed transferring the eight remaining tracts recites that "This sale is made and accepted for and in consideration of the sum of $1,750,266.66, in cash." In our opinion each of the sales in question was made for cash and there was, at no time, any obligation of the city of New Orleans to pay interest. There was no point of time between November 4, 1925 and December 16, 1927, at which the city of New Orleans owed any money to the petitioner in connection with the sales in question. We think it follows that if there was no debt, no money withheld, and no obligation to pay money, there was no agreement, contract or obligation to pay 39 1024 interest. Cf. ; affd., ; certiorari denied, ; ; ; . Decision will be entered for the respondent.Footnotes1. Sec. 213. For the purpose of this title * * * (a) The term "gross income" includes gains, profits and income * * * from * * * trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * * (b) The term "gross income" does not include the following items, which shall be exempt from taxation under this title: * * * (4) Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; * * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620886/	ALAN K. and PATSY J. MINOR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMinor v. CommissionerDocket No. 13037-88United States Tax CourtT.C. Memo 1990-418; 1990 Tax Ct. Memo LEXIS 435; 60 T.C.M. (CCH) 435; T.C.M. (RIA) 90418; August 6, 1990, Filed 435 Decision will be entered under Rule 155. Alan K. Minor, pro se. John Keenan, for the respondent. PARR, Judge. PARRMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in and additions to petitioners' joint Federal income tax returns as follows: Additions to TaxTaxable YearDeficiencySec. 6653(a)(1)Sec. 6653(a)(2)1982$ 1,653.06$ 82.6519833,383.20169.1619844,270.00213.501985614.9030.74Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended and in effect for the taxable years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure. After concessions, the issues for decision are: (1) whether the interest earned during all years in issue on various joint savings accounts and certificates of deposit constitutes income to petitioners, rather than petitioners' children; (2) whether petitioners overstated their employee business expenses for all years in issue; (3) whether for taxable year 1984 petitioners are required to recapture $ 3,371 of the $ 5,000 they expensed in 1983 under section 179 on the 1984 Corvette; and (4) whether petitioners are 436 liable for additions to tax for negligence under section 6653(a)(1) and (2). FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and exhibits are incorporated herein. Petitioners resided in Gould, Ark., at the time they filed their petition in this Court. Unless otherwise indicated, references to petitioner are to Alan K. Minor. Interest IncomeDuring 1982 and 1983 petitioners had two children, Alan Keith (herein "Keith") and Alandrea (herein "Alandrea"). In 1984 petitioners had a third child, Aaron (herein "Aaron"). 1 During 1982 petitioners deposited money in various savings account with First Federal Savings and Loan (herein "First Federal") and Worthen Bank and Trust (herein "Worthen Bank"), and purchased short-term certificates of deposit on behalf of Keith and Alandrea. The accounts and certificates were in petitioner's name and either Keith's or Alandrea's name, or both their names. Petitioner did not, however, name himself "trustee" on any of 437 the savings accounts or certificates of deposit. The accounts and certificates earned $ 4,653 in interest during 1982. Petitioners reported the interest on Keith's and Alandrea's 1982 income tax returns. In 1983 petitioner transferred some of the money from the savings accounts, and some of the funds from the certificates of deposit into the Worthen Ready-Fund Account (herein "Worthen account"). The Worthen account was opened in petitioner's and either Keith's or Alandrea's name, jointly. Petitioner did not name himself trustee of the account. The accounts and certificates together earned $ 3,146 in interest during 1983. Petitioners reported the interest on Keith's and Alandrea's 1983 income tax returns. On or about August 30, 1983, petitioner used $ 20,487.79 of the Worthen account funds to purchase 500 shares of Wal-Mart common stock on behalf of his minor children. However, he purchased the stock in his name, rather than the children's. During 1984 the accounts and certificates earned $ 1,579 in interest. Petitioners reported the interest on Keith's and Alandrea's 1984 income tax returns. On or about January 30, 1985, the Wal-Mart stock was sold for $ 22,625. Petitioners 438 reported the $ 2,137.21 long-term capital gain on their 1985 tax return, rather than reporting it on their children's returns. In February 1985 petitioner used the $ 22,625 stock proceeds, $ 10,000 of his own money, and the funds remaining in the Worthen account to purchase a one-year $ 40,000 certificate of deposit (number 417397); $ 30,000 on behalf of the three children, and $ 10,000 for petitioners. The certificate earned 9.25-percent interest annually, matured on February 6, 1986, and was registered to "Alan K. Minor or Alan Minor, II, or Alandrea Minor or Aaron Minor." In 1985 petitioners put their house in Little Rock, Ark., up for sale and built a $ 57,000 home in Gould, Ark. They borrowed $ 30,000 from the First State Bank of Gould to pay a portion of the estimated construction costs, and intended to use the proceeds from the sale of their house in Little Rock to pay the additional costs. However, their house in Little Rock had not sold by the time they needed additional funds. Accordingly, petitioner tried, without success, to obtain a home equity loan on the house in Little Rock from Worthen Bank. However, by May 10, 1985, Worthen Bank agreed to lend petitioner $ 30,900 439 if the $ 40,000 certificate of deposit was provided as collateral. Petitioners agreed to that arrangement and thus obtained the loan. The $ 33,835.92 single payment Worthen note was due February 6, 1986. During 1985 the accounts and certificates together earned a total of $ 3,390.92 in interest. Petitioners reported the children's share of the interest on returns they filed on behalf of Keith and Alandrea. They did not file a return on behalf of Aaron. On February 6, 1986, the Worthen note was due. However, petitioners' house in Little Rock still had not sold, and they did not have the funds to pay the Worthen note. Accordingly, they borrowed $ 33,835.92 of the $ 40,000 certificate of deposit to pay off their personal loan. At all times petitioners intended to repay the amount borrowed from the children's portion, once their house in Little Rock sold. As of February 6, 1986, the $ 40,000 certificate of deposit had earned approximately $ 3,800 in interest, of which approximately $ 2,873 belonged to the children. On or about March 14, 1986, the house in Little Rock finally sold for $ 50,000. The buyers assumed a $ 22,000 first mortgage, paid $ 12,000 in cash, and petitioners 440 gave a $ 16,000 second mortgage, i.e., a $ 16,000 installment note, which required monthly payments of $ 171.94 for 15 years beginning April 1986. Petitioners assigned their interest in the second mortgage, i.e., the $ 16,000 installment note, to their children as partial repayment of the funds they borrowed. The mortgage assignment was not recorded with the Pulaski County Circuit Court Clerk until June 24, 1986. Additionally, on or around April 8, 1986, petitioners used the $ 12,000 cash from the sale, and $ 3,000 of their own money to purchase a 182-day, $ 15,000 certificate of deposit, number 427691, for their three children. The certificate was in the children's names and earned interest of 7.15 percent per annum. On or around May 19, 1986, petitioner deposited an additional $ 1,873 in the children's account at the First Federal Savings, account number 338559-8, of which he was custodian. All payments on the $ 16,000 mortgage were deposited in the children's account, number 338559-8, with First Federal Savings. Petitioners never "borrowed" any of the funds again, and never withdrew any of the money to pay expenses to support their children. The funds remained in the various 441 accounts for the benefit of the children. Car ExpensesAt all relevant times petitioner worked as an Internal Revenue Agent in the Examination Division of the District Director's office in Little Rock, Ark. His job required him to travel frequently. As a consequence, he used his personal cars for business purposes. 1982During 1982 petitioner used three cars for business purposes: a black 1980 Lincoln Mark VI (January 1 through September 28), a white 1980 Lincoln Mark VI 2 (September 29 through December 31), and a 1980 Corvette (January 20 through December 31). Petitioner used the black Lincoln 78 percent for business purposes during 1981. His business travel did not fluctuate during 1982. Therefore, he estimated that he used the black and white Lincolns approximately the same percentage of business use during 1982. Petitioner traveled a total of 14,912 business miles in those cars. On Form 2106, Employee Business Expenses, petitioner reported that (1) he used the 1980 Corvette 92.3 percent, and the 1980 Lincolns 73.4 percent for business 442 purposes; (2) the total actual gas, insurance, and repair expenses on the 1980 Corvette and the 1980 Lincolns were $ 2,267.87 and $ 2,515.29, respectively; (3) the total allowable expenses were $ 8,409.49 and $ 2,912.88 for the Corvette and the Lincolns; and (4) he drove the Corvette and 1980 Lincolns 6,880 and 6,711 business miles, respectively. Additionally, petitioner elected to expense $ 5,000 of the cost of the 1980 Corvette under section 179. Petitioners deducted $ 8,558.67 of the total expenses claimed on their Form 1040. 1983During 1983 petitioner used four cars in connection with his business: a 1980 white Lincoln (January 1 through February 17), 3 a 1981 Lincoln (February 18 through December 31), a 1980 Corvette (January 1 through June 21), 4 and a 1984 Corvette (June 22 through December 31). Petitioner traveled a total of 13,339 business miles in those cars. On Form 2106 petitioner reported that (1) he used the Corvettes 92.6 percent, and the Lincolns 73.1 percent for business purposes; 443 (2) the total actual gas, insurance, and repair expenses on the Corvettes and the Lincolns were $ 1,988.69 and $ 1,907.79, respectively; (3) total allowable expenses on the Corvettes and the Lincolns were $ 10,119.53 and $ 2,595.59, respectively; and (4) he drove the Corvettes and Lincolns 7,384 and 4,823 business miles, respectively. Additionally, petitioner elected to expense $ 5,000 of the 1984 Corvette under section 179. Petitioners deducted $ 10,046.34 of the total expenses claimed on their Form 1040. 1984During 1984 petitioner used a 1984 Corvette and a 1981 Lincoln for business purposes. Additionally, he traveled a total of 9,608 business miles in those cars. On Form 2106 petitioner reported that (1) he used the 1984 Corvette 92.6 percent, and the 1981 Lincoln 73.1 percent for business purposes; (2) the total actual gas, insurance, and repair expenses on the Corvette and the Lincoln were $ 2,284.11 and $ 959.64, respectively; (3) the total allowable expenses on the Corvette and Lincoln were $ 7,236.54 and $ 2,549.44, respectively; and (4) he drove the Corvette and the Lincoln 7,272 and 2,280 business miles, respectively. Petitioners deducted $ 7,804.30 5 of the total expenses 444 claimed on their Form 1040. 1985In 1985 petitioner continued to use the 1984 Corvette and the 1981 Lincoln for business purposes, and drove a total of 4,338 business miles. On Form 2106 petitioner reported that (1) he used the 1984 Corvette 20 percent, and the 1981 Lincoln 5 percent for business purposes; (2) the total actual gas, insurance, and repair expenses on the Corvette and Lincoln were $ 2,512 and $ 2,381, respectively; (3) total allowable expenses on the Corvette and Lincoln were $ 1,594.40 and $ 281.05, respectively; and (4) he drove the Corvette and the Lincoln 3,327 and 1,011 business miles, respectively. Petitioners deducted $ 985.09 of the total expenses claimed on their Form 1040. Notice of DeficiencyRespondent issued petitioners a notice of deficiency for their 1982, 1983, 1984, and 1985 taxable years. Respondent determined that the interest petitioners reported on the children's returns for each year in issue was properly taxable to petitioners, rather than the children. Additionally, respondent made adjustments to petitioner's employee business expenses as follows: (1) 1982 - Respondent 445 determined that petitioner used the 1980 Corvette 91 percent, the white 1980 Lincoln 52 percent, and the black 1980 Lincoln 47 percent for business purposes. Additionally, he disallowed a total of $ 1,251.22 of the insurance and repair expenses claimed, and increased the depreciation deductions by $ 466.84. (2) 1983 - Respondent determined (1) that petitioner used the 1980 Corvette 24 percent, the 1980 Lincoln 38 percent, the 1981 Lincoln 33 percent, and the 1984 Corvette 68 percent for business purposes; and (2) that petitioners had to recapture $ 3,750 of the $ 5,000 expensed in 1982 under section 179 for the 1980 Corvette. Additionally, he disallowed $ 712.57 of the total insurance and repair expenses claimed on the cars; 6446 (3) 1984 - Respondent determined (1) that petitioner used the 1984 Corvette 32 percent, and the 1981 Lincoln 16 percent for business purposes; and (2) that petitioner must recapture $ 3,750 of the benefit they derived from expensing the 1984 Corvette in 1983. Additionally, he disallowed $ 1,144.05 and $ 568.58 of the insurance and repair expenses claimed on the 1984 Corvette and the 1981 Lincoln, respectively. (4) 1985 -- Respondent determined (1) that petitioner used the 1984 Corvette 15 percent, and the 1981 Lincoln 7 percent for business purposes; (2) that petitioners expended a total of $ 2,565.50 on the 1984 Corvette, and $ 1,679.90 on the 1981 Lincoln. Additionally, he disallowed $ 31.55 of the depreciation claimed on the 1984 Corvette, and all the depreciation claimed on the 1981 Lincoln. Before trial, the parties agreed that (1) during 1984 the 1981 Lincoln and the 1984 Corvette were used 20 percent and 41 percent of the time, respectively, for business purposes; and (2) during 1985 the 1981 Lincoln and the 1984 Corvette were used 7 percent and 20 percent of the time, respectively, for business purposes. 7Respondent concedes that petitioners are not required to recapture the $ 3,750 benefit they received from expensing the 1980 Corvette in 1982. 447 Additionally, on brief respondent recomputed the recapture amount on the 1984 Corvette to be $ 3,371, rather than $ 3,750 as originally determined. OPINION The first issue for decision is whether petitioners or their children are taxable on the interest earned on the money deposited in the savings accounts, certificates of deposit, and the Worthen account. Petitioners bear the burden of proving respondent's determination is in error. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Petitioners allege that they made a bona fide gift of the money to their children and, therefore, the interest earned on the money is taxable to the children. Respondent contends that petitioners never made a gift of money to the children, and, therefore, the interest earned on those funds belongs to petitioners. In determining whether a transfer of property is a gift, consideration must be given to the transferor's objective intent at the time the transfer occurred, Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278, 286 (1960), and by the degree of control over the res the donor retains, Rodney v. Commissioner, 53 T.C. 287">53 T.C. 287, 314 (1969). The donor may exert normal management control over the funds transferred 448 without indicating a lack of donative intent. Frank v. Commissioner, 27 B.T.A. 1158">27 B.T.A. 1158, 1163 (1933); Jolly's Motor Livery Co. v. Commissioner, T.C. Memo. 1957-231. Moreover, strict trust-like formalities are not required in order for interest income to be taxed to the children. Heller v. Commissioner, 41 B.T.A. 1020 (1940), affd. sub nom. Ehrman v. Commissioner, 120 F.2d 607">120 F.2d 607 (9th Cir. 1941), cert. denied 314 U.S. 668">314 U.S. 668 (1941); Jolly's Motor Livery Co. v. Commissioner, supra.However, if the transferor commingles the minors "gifted" funds with his own funds, and uses them for his own benefit, or to support the child, true donative intent may be lacking. See Heller v. Commissioner, 41 B.T.A at 1030-1031; Garris Investment Corp. v. Commissioner, T.C. Memo. 1982-38. Cf. Fincke v. Commissioner, 39 B.T.A. 510">39 B.T.A. 510, 515 (1939). Petitioners make the following arguments to support their claim that a bona fide gift was made: (1) That even though petitioner purchased the stock in his name, he did it on behalf of the children in order to get a greater return than the certificate of deposit would produce. (2) That they reported the gain from the sale of the stock on their return, rather than the children's 449 returns, because "the IRS was taking the position that the money should have been reported by" petitioners. (3) That they reinvested the stock proceeds in their children's names. (4) That even though they used a portion of the children's funds to pay off their Worthen Bank debt, they exchanged or substituted other property of equal value in 1986, and therefore, the children retained the original gift. It is true that petitioners used some of the children's funds as collateral to secure a loan from the Worthen Bank, and then to pay off the loan. However, that was the only instance they used the children's funds, and they only used the funds because their house in Little Rock had not sold and they had no other means to pay the Worthen loan. Thereafter, petitioners immediately recontributed the total amount borrowed. In other words, petitioners borrowed a portion of the children's funds. In this case we do not believe that one action negates petitioners' intention to make a gift of the funds to their children. We conclude that petitioners had a clear and unmistakable intention to absolutely and irrevocably divest themselves of the title, dominion, and control (except normal management) 450 of the funds. See Weil v. Commissioner, 31 B.T.A. 899 (1934). Thus, the interest income is properly taxable to the children, not petitioners. Automobile DeductionsThe next issue for decision is whether petitioners are entitled to deduct automobile expenses and depreciation claimed in 1982, 1983, 1984, and 1985 in excess of the amounts respondent determined. Section 162 allows a taxpayer to deduct automobile expenses, i.e., gas, maintenance, repair, insurance, if it is used in furtherance of the taxpayer's business. See Jenkins v. Commissioner, T.C. Memo 1988-292">T.C. Memo 1988-292, affd. without published opinion 880 F.2d 414">880 F.2d 414 (6th Cir. 1989). Unless the taxpayer can prove the actual business expenses, only that percentage of the total expenses attributable to the business use is deductible. See Cobb v. Commissioner, 77 T.C. 1096">77 T.C. 1096, 1101-1102 (1981); Henry Schwartz Corp. v. Commissioner, 60 T.C. 728">60 T.C. 728, 744 (1973); Jenkins v. Commissioner, supra.The percentage is calculated by multiplying "total expenses" by a ratio consisting of the business miles over the total miles. Bussabarger v. Commissioner, 52 T.C. 819">52 T.C. 819, 828-829 (1969). Additionally, a taxpayer need only establish the percentage of business use 451 to claim depreciation. Henry Schwartz Corp. v. Commissioner, supra.Petitioner introduced travel vouchers and daily logs for all years in issue. Those documents contain sufficient information for us to determine the total business miles he traveled each year. However, they neither contain, nor did petitioner present any records of the total mileage (business plus personal) each car was driven each year. He did, however, testify that during 1982 he drove the 1980 Corvette a total of 11,570 miles, of which 10,760 were business, and that the black and white Lincolns were used 78 percent for business. Additionally, petitioner testified that during 1983 he drove the 1980 Corvette a total of 1,255 miles, of which 1,075 were business; the 1984 Corvette a total of 7,839 miles, of which 7,384 were business; and the 1981 Lincoln a total of 6,598 miles, of which 4,823 were business. Based on the evidence before us, we find for petitioner on the business use percentage of the Lincolns for 1982. Petitioner testified that the Lincolns' 1982 business use was substantially the same as his 1981 business use. We believe him. See Reynolds v. Commissioner, T.C. Memo 1980-422">T.C. Memo. 1980-422. Additionally, we 452 conclude that the business use percentage during 1983 of (1) the 1980 Corvette was 85.7 percent; (2) the 1984 Corvette was 94.2 percent; and (3) the 1981 Lincoln was 68.7 percent. However, we agree with respondent's determinations on the 1980 Corvette's percentage of business use for 1982, and on the White Lincoln for 1983. Petitioners also allege that their total gas, insurance, and repair expenses for the 1982, 1983, 1984, and 1985 exceeded respondent's determination. Petitioner sufficiently proved that he expended $ 1,729.71, $ 1,290.49, and $ 940 for gas in 1982, 1983, and 1984, respectively, and that they were expended for business purposes only. Thus, petitioner is entitled to deduct the following amounts without any reduction based on the application of the percentage of business use: 1982Black Lincoln$ 735.13White Lincoln219.671980 Corvette774.91$ 1,729.7119831980 Corvette$ 206.481980 Lincoln98.081981 Lincoln481.351984 Corvette504.58$ 1,290.4919841981 Lincoln$ 266.961984 Corvette673.04 $ 940.00 However, petitioners failed to provide any receipts, or documents for insurance and repairs for any of the years in issue, and gas expenses for 1985. Accordingly, we agree 453 with respondent's adjustments for those items. Section 179 RecaptureThe next issue for decision is whether petitioners are required to recapture $ 3,371 under section 179 in 1984. Section 179 allows a taxpayer to elect to expense up to $ 5,000 of the cost of certain property, including an automobile, that is used in his trade or business. If the property is not used 100 percent for business purposes, the allowable deduction is determined by its business-use percentage. Sec. 179(c)(1)(A). However, if the property is not used predominantly in a trade or business at any time before the close of the second taxable year following the taxable year in which it was placed in service, the taxpayer is required to recapture any benefit derived from expensing the portion of its cost in the year it ceases to be so predominantly used. Sec. 179(d)(10); sec. 1.179-1(e)(1) and (2), Income Tax Regs. The benefit derived from expensing the property equals the excess of the amount expensed under section 179 over the total amount deductible under section 168 for the portion of the property to which the expensing relates. Sec. 1.179-1(e)(1), Income Tax Regs.In June 1983 petitioners purchased a 1984 454 Corvette, and elected to expense $ 5,000 on their 1983 tax return. However, in 1984 and 1985 the business-use percentage of the Corvette was only 41 percent and 20 percent, respectively. Petitioner agrees to these percentages. However, he argues that because he used the Corvette predominantly for business over the life of the car, the recapture provision of section 179(d)(10) does not apply. We do not agree. See McFadden v. Commissioner, T.C. Memo. 1989-174, affd. without published opinion 894 F.2d 1342">894 F.2d 1342 (8th Cir. 1989), cert. denied U.S. (1990). Accordingly, we hold for respondent. Additions to TaxThe final issue for decision is whether petitioners are liable for additions to tax for negligence under section 6653(a)(1) and (2) for all taxable years in issue. Section 6653(a)(1) provides that if any underpayment of income tax is due to negligence or intentional disregard of the rules and regulations, the addition is 5 percent of the underpayment. Section 6653(a)(2) imposes an additional amount equal to 50 percent of the interest amount due on the underpayment. Petitioner has the burden of proof on this issue. Rule 142(a). Under the facts of this case we find petitioners were 455 not negligent. To reflect the foregoing, Decision will be entered under Rule 155. Footnotes. 50 percent of the interest due on the deficiency.↩1. Petitioners claimed Keith and Alandrea as dependents on their 1982 and 1983 income tax returns, and Keith, Alandrea, and Aaron as dependents on their 1984 and 1985 income tax returns.↩2. The black Lincoln was destroyed in an accident in September, and on September 29, 1982, petitioners replaced it by purchasing the white Lincoln.↩3. On or about February 18, 1983, petitioners traded in the 1980 white Lincoln for the 1981 Lincoln.↩4. On or about June 22, 1983, petitioners traded in the 1980 Corvette for a 1984 Corvette.↩5. Due to a mathematical error, petitioner should have deducted only $ 7,794.40.↩6. Respondent allowed automobile insurance of $ 426.39 for the 1984 Corvette, $ 341.70 for the 1981 Lincoln, $ 303.91 for the 1980 Corvette, and $ 145.25 for the 1980 Lincoln.7. The parties did not stipulate to the business use ratio of the cars used during 1982 and 1983, or to the total amount of business expenses petitioner incurred while operating the two cars during 1984 and 1985.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620888/	MAFCO EQUIPMENT COMPANY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMafco Equip. Co. v. Comm'rDocket No. 10576-81. United States Tax CourtT.C. Memo 1983-637; 1983 Tax Ct. Memo LEXIS 153; 47 T.C.M. (CCH) 88; T.C.M. (RIA) 83637; October 13, 1983. Bart A. Brown, Jr. and Michael H. Brown, for the petitioner. Mark S. Feuer, for the respondent. KORNERMEMORANDUM FINDINGS OF FACT AND OPINION KORNER, Judge: Respondent determined deficiencies in petitioner's Federal income taxes as follows: Fiscal Year EndingDeficiencyMay 31, 1976$4,349.00May 31, 197751,046.00The sole issue for decision is whether income realized by petitioner from sales of certain items of tangible personal property during its fiscal years 1976 and 1977 should be afforded capital gain treatment under section 1231. 1155 FINDINGS OF FACT Some of the facts have been stipulated and are so found.The stipulations of fact, together with the exhibits attached thereto, are incorporated herein by this reference. Mafco Equipment Company (hereinafter "petitioner") is a corporation whose principal place of business was at Harrison, Ohio, on the date the petition in this case was filed. Petitioner filed its U.S. corporate income tax returns for its fiscal years ending May 31, 1976, and May 31, 1977, with the Internal Revenue Service Center at Covington, Kentucky. Saince its incorporation in 1966, petitioner has been engaged in a progressively expanding business of leasing specialized equipment to companies which build and maintain power generation plants. In 1966, petitioner had only about 10 items of equipment in its rental fleet. By June 1, 1975, petitioner's fleet had grown to 324 items and further expanded to 375 items by July 31, 1977. 2 During the years in issue, substantially all of the equipment constituting petitioner's rental fleet was of a kind used in lifting, positioning and attaching various materials to boilers of power generation plants.Such equipment consisted principally of cranes, 156 derricks, hoisting engines, air tuggers, elevators, manual lifting equipment, welders and air tools. 157 Petitioner's leasing business is a substantial enterprise. Petitioner has placed rental property in more than 40 states of the contiguous United States. On June 1, 1976, the cost of petitioner's total investment in its rental fleet exceeded $1,100,000 and on May 31, 1977, such cost exceeded $1,900,000. On its Federal income tax returns for its fiscal years ending 1976 and 1977, petitioner reported gross receipts of $999,562 and $1,135,959, respectively, exclusive of gains petitioner derived from sales of its depreciable assets. 3158 Petitioner does not manufacture the equipment comprising its rental fleet, but purchases it. Because of the highly specialized nature of much of the equipment involved, petitioner often finds it extremely difficult to acquire particular items within a reasonable period of time after it determines that it has a need for them, and unavailability of equipment could mean the loss of a leasing customer.Moreover, petitioner considers that it is more profitable to lease rather than to sell equipment in its rental fleet. For these reasons, petitioner resisted attempts by ite leasing customers or others to purchase items from its rental fleet so long as they remained in good working condition. During the years in issue, it was petitioner's established policy not to sell items from its fleet which it considered to be in rentable condition. Petitioner leased its equipment pursuant to the terms of a standard rental agreement. This agreement contained no option to purchase petitioner's equipment and, in fact, contained the following clause: Rental Contract Only14. This is a contract of rental only, and Customer acquires no right, title or interest in or to Equipment except as expressly159 provided in this Rental Agreement. Customer shall not suffer any liens or encumbrances to attach to Equipment or any part thereof and shall defend, indemnify and hold Owner harmless from all loss, liability and expense by reason thereof. Customer shall not sublet Equipment nor assign this Rental Agreement in whole or in part. In the event Customer shall permit sub-contractors or others not in Customer's employ to operate or use Equipment, Customer shall see that such operation or use by others at all are in accordance with this Rental Agreement, and Customer shall remain fully responsible to Owner for all such use by others.Under certain rather well-defined circumstances, (discussed infra), petitioner modified its standard rental agreement to reflect unique aspects of particular transactions. Petitioner's leasing business was a dynamic, ongoing enterprise. During the years in issue, petitioner purchased numerous items for use in its rental fleet, and also sold certain of these depreciable assets from its fleet. Sales by petitioner of depreciable assets during its fiscal years ending 1976 and 1977 generated reported net gains of $34,534, and $419,638, respectively. 160 Some of these gains were reported by petitioner as ordinary income either because the property which generated the gains was held by petitioner for six months or less, or pursuant to the section 1245 recapture provisions. The gains (and losses) which were generated by the sales of assets held by petitioner for six months or less were not netted by petitioner against gains (and losses) generated by assets held by petitioner for more than six months. Of the $34,534 reported by petitioner as gains from the sale of its depreciable assets during its fiscal year ending 1976, petitioner reported $10,369 as ordinary income and $24,165 as long-term capital gain. Of the $419,638 reported by petitioner as gains from the sale of its depreciable assets during its fiscal year ending 1977, petitioner reported $136,051 as ordinary income and $283,587 as long-term capital gain.The evolution of petitioner's rental fleet during the years in issue is demonstrated by the following chart: RentalRentalRentalRentalFleetPurchasedSoldFleetPurchasedSoldFleetEquipment6/1/75Fiscal 76Fiscal6/1/76Fiscal 77Fiscal5/31/777677Cranes2139111Derricks1652111527Hoists4914825667Elevators47115610Air Tuggers12211314720Trailers61718Freight Cars1118 Pack Welders62177113ElectricWelders81936Gas Welders311301328Generators11110414Mast Section110Heaters2020317Air Tools3030131Impact Wrenches6660Air Nailer2220Die Grinder1110Clay Digger111Vibrator333TorqueConvertors111Paving Breaker4431Come-a-long1717512Air Compressor1511154118Spiders111141899Compactors532341Dollies777Jacks18181316Aluminum Picks18188719Water Pumps62426Trolleys13132312Ladders555Slings666Load Chain111Air Mover111Block & Sheaves4413Mortar Mixer1110ElectricGrinder1110TOTALS32451163599882375161 The sales by petitioner if items from its rental fleet during the years in issue occurred under certain rather well defined circumstances which are set out in the following paragraphs. I "Category I Sales:" Lost or Stolen PropertyBecause of the nature of the projects on which petitioner's leasing customers worked, it was inevitable and anticipated by petitioner that some of the equipment leased to such customers would be lost, stolen from the job site or damaged by the lessee. To take account for these situations, it was petitioner's well-established policy to require the lessee to replace any lost, stolen or damaged equipment with a piece of similar equipment, or, in the alternative, to "purchase" (i.e., pay for) such equipment for an amount equal to the value of the lost, stolen or damaged item. Thus, Paragraph 10 of the standard rental agreement used by petitioner provided: Damaged Responsibility10. All loss or damage to Equipment of any part thereof from any cause whatsoever, including but not limited to fire, theft, comprehensive losses, collision and upset, shall be the sole responsibility of Customer and shall be paid by Customer promptly upon receipt162 of Owner's invoice. * * . Of the total sales of items from its rental fleet made by petitioner during its fiscal years ending 1976 and 1977, 18 of such "sales" were of items that were either lost, stolen from the job site, or damaged, and therefore "purchased" by the lessee pursuant to the above lease provision. These items included the following: DepreciationRecapture &Ordinary IncomeGain (orItem ofDateDateTotal(or Loss) NotLoss) inEquipment4 Acquired "Sold"Gain (Loss)in DisputeDisputeOne-ton ChainHoist12/11/75$193 $193Bull Hose9/4/75746 $746 Aluminum Pick197510/19/7688 7711 1-1/2 Toncome-a-long197412/8/76136 36100 Impact Wrench196912/23/761,372 2171,155 1-1/2 TonCome-a-long197411/23/7671 3635 (2) ChainHoists19732/16/77482 42656 (2) 20-TonJacks19695/6/7115 7144 Black & DeckerHammer197611/9/76162 162Black & DeckerHammer196811/9/76385 122263 300-ampElectricWelder19736/1/76(52)(52)(3) AluminumPicks19755/13/77195 15342 Air Nailer19688/10/76200 200225-amp GasWelder19737/1/76186 186163 II "Category II Sales:" Old and/or Obsolete EquipmentPetitioner, as a lessor of specialized construction equipment has, over the years, acquired a reputation of providing only equipment which is maintained in top-quality working condition. This reputation is essential to petitioner's continued business success due to the expense, potential liability and loss of business reputation which would be caused by failure of petitioner's equipment on a job site. Moreover, it is equally important to petitioner's business success that the equipment in its rental fleet constitute technologically updated items which meet current safety standards established by governmental regulations. In order to assure that its equipment met the above standards, petitioner maintained a staff of service mechanics who reported on the condition of the equipment in its rental fleet. When164 petitioner determined that an item of equipment in its rental fleet was no longer in top condition, or that an item of equipment was technologically obsolete or failed to conform to current regulatory requirements of safety, petitioner either disposed of the item by sale, or salvaged useable parts from such equipment to repair other items in its rental fleet. The period of time that the assets comprising petitioner's rental fleet remained useful as rental assets varied from two to nine years. This was because most of the equipment employed by petitioner in its fleet was used equipment when acquired by petitioner, and varied in quality at the time petitioner purchased the equipment. Additionally, some projects which petitioner's equipment lessees worked on subjected petitioner's equipment to relatively more wear than did other projects.The sales of items of equipment which were no longer appropriate for petitioner's rental fleet due to their age, condition, or obsolescence were negotiated in an informal manner. Petitioner did not maintain a sales force, a showroom or other selling facilities for selling these items. Rather, petitioner often attempted to sell equipment which165 it knew had become inappropriate for its rental fleet while it was out on lease, before the expiration of the lease term. These items had previously been used in petitioner's leasing business and were no longer desirable items for petitioner's rental fleet for one or more of the reasons stated above. Petitioner was able to encourage the lessee to purchase the items by allowing a liberal credit against the quoted sales price for a portion of the rents already paid by the lessee. Moreover, in this manner, petitioner was often able to rid itself of items which were no longer useful to its rental fleet at a profit without engaging in substantial sales activity or transportation expense back to petitioner's premises. Generally, when petitioner determined that an item of equipment, which was not currently out on lease, had reached the end of its useful rental life, petitioner sold the item directly from its warehouse. However, in two instances during the years in issue, in lieu of selling outright equipment which had reached the end of its useful rental life, petitioner entered into modified "lease" agreements which ultimately resulted in sales. One item was leased to one of166 petitioner's customers under a "modified rental agreement." This rental agreement granted the lessee an option to purchase the property for a specified purchase price with 80 percent of the rent paid by the lessee to be applied to reduce the purchase price, which option the lessee exercised. The option to purchase was granted by petitioner in this instance because petitioner considered the item of equipment to be already beyond its useful rental life and wanted to encourage the lessee to purchase the item. The other item was "leased" to one of petitioner's customers pursuant to a "rental-purchase" agreement. Pursuant to this agreement, ownership of this item was transferred to the "lessee" after it made 10 monthly "rental payments." The following schedule shows those items sold because they were no longer useful to petitioner's rental fleet. DepreciationRecapture or OtherTotalOrdinary IncomeGain (orDateDateGain(or Loss)Loss) in5 Item of Equipment AcquiredSold(Loss)Not in DisputeDispute2,000 lb. AirTugger 11/18/75$1,198 $98$1,100 Wacker Compactor +9/25/75489 39450 (2) 50 hp. Pumps 10/29/75274 22450 8-pack Welders 3/3/76311 311Diesel Generator 19709/3/757,074 2246,850 Air Spider 9/10/75746 746 (2) Air Spiders +6/4/751,180 280828 Air Spider +7/1/75828 464364 Gas Welder +19701976384 384Air Compressor +19691/13/76929 79850 Mast Section +4/19/76746 746 Air Tugger +19742/10/772,955 2552,700 Air Tugger +19752/10/772,055 2551,800 225-amp Welder o19731/3/771,366 1,038328 8-pack Welder #19736/11/76(1,051)(1,051)Electric AirCompressor 19686/4/761,642 1,642(2) ElectricWelders 19707/12/7663 63Air Tugger 19752/1/77923 363560 Air Tugger 19752/1/77674 264410 Air Tugger 19742/17/773,032 2552,777 (4) Sheaves &Blocks 19765/20/7769 69Spider Staging 19752/1/77403 37924 Impact Wrench 19754/13/77769 174595 Air Hammer 19698/30/76395 82313 Jack 19709/15/7692 92Wrench Tester 19681/20/77478 123355 (2) WackerCompactors 19691/7/773,183 833,100 (3) ImpactWrenches 19681/17/77865 157708 Heater 19703/10/77273 118155 Impact Wrench 19684/11/77462 82380 Grinder +19699/1/7670 70Gas Welder +19741/3/77664 664(2) Heaters +19702/10/77257 157100 Chain Hoists +19673/28/77329 204125 Impact Wrench +19754/13/771,629 1741,455 Wrench Tester &(4) Jacks +19695/6/77240 112128 Mortar Mixer +19688/16/76135 13510-Ton Trolley +197310/6/76304 304Single-Drum Hoist +196911/2/761,780 7801,000 Two-Drum Hoist +197512/13/76931 767164 Cut-Off Saw +19755/6/771,049 544505 167 III "Category III Sales:" Business ExigenciesAs noted above, it was petitioner's policy to resist selling items of its equipment which remained in good rental condition. However, during the years in issue, circumstances arose which required petitioner to sell certain items of equipment whose useful rental life had not yet expired, and which were not lost or damaged by the lessee. The relevant facts relating to these sales are set out in the following subparagraphs. A. The Babcock and Wilcox SalesDuring the years in issue, Babcock and Wilcox Company (hereinafter "B&W") was petitioner's largest rental customer. Beginning in 1972, B&W instituted a company policy168 that, in general, any agreement it entered into with any of its construction equipment lessors must contain an option for B&W to purchase the leased assets. When B&W notified petitioner of its newly established policy, petitioner resisted granting options for B&W to purchase its equipment. However, officials of B&W informed petitioner that unless options to purchase were forthcoming, B&W would no longer conduct business with petitioner. Moreover, these officials represented to petitioner that the options to purchase were merely formalities and that said options would probably not be exercised by B&W. The prospect of losing its largest leasing customer, along with representations by certain officials of B&W that any options petitioner granted would probably not be exercised, convinced petitioner to grant B&W the required options to purchase its rental equipment. Accordingly, beginning in 1972, and continuing through the years in issue, petitioner granted B&W options to purchase its rental equipment whenever B&W so required. From 1972 through 1975, petitioner leased approximately 50 items to B&W with purchase options and only one of these options was exercised. In the summer169 of 1976, however, (i.e., during petitioner's 1977 fiscal year), B&W exercised substantially all of the options held by it on petitioner's equipment which was then under lease to B&W. In light of B&W's prior representation that the options to purchase granted by petitioner would probably not be exercised, petitioner considered B&W's actions in the summer of 1976 to constitute a breach of faith. Petitioner's business with B&W was substantially diminished in subsequent years.The following items were sold by petitioner to B&W as the result of B&W's exercise of options to purchase: DepreciationRecapture or OtherOrdinary IncomeGain (orDateDateTotal(or Loss)Loss) inItem of EquipmentAcquiredsoldGainNot in DisputeDispute5,000 lb. Hoist(1/2 interest)19767/9/76$20,053 $1,775 $18,278 5,000 lb. Hoist(1/2 interest)19747/9/7615,020 1,775 13,245 Swing Cab Crane19757/9/7630,813 24,584 6,229 5,000 lb. Hoist19747/9/76(2,518)(2,518)5,000 lb. Hoist19757/9/76(16,595)(16,595)2,000 lb. Hoist19757/9/76(11,142)(11,142)(2) Air Tuggers19757/9/7614,621 14,621 5,000 lb. Hoist19768/21/7625,520 25,520 170 B. The 100-ft. Stiff-leg Derrick and HoistDaniel Construction Company (hereinafter "Daniel") was a developing leasing customer of petitioner's during the years in issue. During its 1977 fiscal year, petitioner had its largest item of rental equipment -- a 100-ft. Stiff-leg derrick and hoist -- on lease to Daniel. Petitioner had acquired this asset in June 1972. Although Daniel had, on two occasions, previously requested petitioner to grant Daniel options to purchase this equipment, petitioner had refused since this item was, in petitioner's view, a fundamental part of its rental fleet and since it was against petitioner's policy to grant options on items needed for its rental fleet. This item was leased to Daniel pursuant to the terms of petitioner's standard rental agreement. However, during petitioner's fiscal year 1977, Daniel anticipated that it would need the 100-ft. stiff-leg derrick for at least seven more years and determined that it was not economical to lease this large item of equipment for such an extended period. Accordingly, in August 1976, Daniel demanded that petitioner sell this item and threatened to discontine doing business with petitioner if petitioner171 refused. Since Daniel was a potentially valuable customer, petitioner did not want to lose its patronage, and petitioner therefore acceded to Daniel's demand and reluctantly sold this item to Daniel during its fiscal year 1977. Petitioner realized a gain on this sale of $134,611 and reported $53,620 of this amount as ordinary income under section 1245. The gain from this sale which remains in dispute is therefore $80,991. C. The 200-Ton Guy Derrick and HoistIn 1972, petitioner purchased a 200-ton guy derrick and hoist. This derrick and hoist is an extremely large item and petitioner did not have adequate space at its Ohio equipment yard to shore it. However, petitioner was able to purchase this item because at the time of purchase petitioner and the seller agreed that petitioner could store the equipment in the seller's staging area in California at no charge until petitioner was able to lease it.Two years after the guy derrick was purchased, petitioner was able to lease it to a customer for about 14 months. At the end of this 14-month lease term, the lessee returned the guy derrick to petitioner in Ohio. The item took up nearly all of the storage space in petitioner's172 Ohio equipment yard, and petitioner was therefore anxious to dispose of it, preferably through lease. However, petitioner was unable to find a lessee. Sometime later, Drummond Coal Corporation, (hereinafter "Drummond") contacted petitioner wanting to purchase the guy derrick and hoist. Although petitioner would have preferred to lease the equipment, and indeed made two efforts to do so to Drummond, that company was not interested in leasing and would only purchase this item. Under these circumstances, petitioner determined that its only alternative was to sell the item to Drummond because it needed the storage space in its equipment yard for other items in its fleet, and accordingly sold it during its fiscal year ending 1977. Petitioner realized a total gain of $138,327 on the sale of this item, reported $8,977 of this gain as ordinary income recapture under section 1245 and reported $129,350 as long-term capital gain. Thus, the gain remaining in dispute from this sale is $129,350. IV Category IV Sales: Miscellaneous SalesThe assets falling within this category cannot be appropriately classified in any of the previous categories. None of these assets were lost or damaged173 by a lessee. Additionally, these assets were either never actually used in petitioner's rental fleet or, if they were, were sold prior to the expiration of their useful rental lives. They are thus not properly classified as Category II assets. Moreover, these assets were not sold upon threat of the purchaser to discontinue leasing business with petitioner or as the result of other compelling business exigencies and therefore cannot be placed in Category III. The peculiar facts relating to these sales are set out in the following subparagraphs. A. 2 Wacker CompactorsIn petitioner's fiscal year ending 1977, Newton Associates, one of petitioner's very good customers, contacted petitioner and informed petitioner that they wished to lease four Wacker compactors. However, petitioner had only two such items available. In order to accommodate this customer, petitioner itself rented two Wacker compactors from another equipment lessor and then rented these items, together with petitioner's own compactors, to Newton Associates for a four-month period. During the rental period, Newton Associates requested to purchase all four of these compactors. Since petitioner had determined174 that the two compactors which it owned had reached the end of their useful rental lives, it was anxious to make this sale. (See Category II Sales, supra). Therefore, petitioner purchased the two items it had previously rented from the other equipment lessor and sold them to Newton Associates. Petitioner realized and reported a short-term capital gain (i.e., ordinary income) of $845 on this sale. Thus, petitioner reported no amount of this gain as long-term capital gain. B. Two Ten-Ton TrolleysIn 1976, Cherne Contracting Company (hereinafter "Cherne") one of petitioner's valued leasing customers, approached petitioner wanting to rent two ten-ton trolleys.At the time of this request, petitioner did not have any such items which would conform to Cherne's specifications. Petitioner had found, through experience, that items such as these were not frequently requested for rental and therefore was reluctant to purchase such items for its fleet.Nevertheless, since Cherne was one of petitioner's valued customers, petitioner purchased two ten-ton trolleys for lease to Cherne as an accommodation. During the lease term, Cherne expressed an interest in purchasing these items. 175 Since petitioner never really wanted these items for its rental fleet in the first place, it sold them to Cherne at its request on January 1, 1977, for a total sales price of $1,349. Petitioner realized a gain of $460 on these sales, all of which was reported as short-term capital gain (i.e., ordinary income). Thus, no gain arising from these sales remains in dispute herein. C. Stiff-Leg Derrick and 2 DerricksPetitioner purchased a one-half interest in the stiff-leg derrick in 1975 and purchased the two other derricks outright in 1972. Petitioner acquired its interest in these items through a Mr. Waterman of Waterman Supply Company upon his recommendation that such items might be useful to petitioner in its leasing business. These items were purchased by petitioner sight unseen. When petitioner inspected these items, it found that they were not of sufficiently good quality to be included in its rental fleet and therefore sold them during its fiscal year ending 1977. The stiff-leg derrick was sold on June 18, 1976, for a total sales price of $4,530.Petitioner realized a gain of $1,376 on this sale and reported $906 as ordinary income pursuant to section 1245 and $470176 as long-term capital gain. Thus, the gain remaining in dispute with respect to this item is $470. The other two derricks were sold by petitioner on May 10, 1977, for a total sales price of $26,850. Petitioner realized a gain of $11,697 on this sale and reported $10,847 as ordinary income pursuant to section 1245. The gain remaining in dispute with respect to these items is therefore $850. D. Sales From Lot PurchasesAs noted above, much of the equipment constituting petitioner's rental fleet was used equipment when it was acquired by petitioner. Some of this used equipment was acquired by petitioner at auctions in which public utilities, after completing the construction of a power plant, sold surplus equipment which had been used for the construction of the plant. The public utilities conducted these action sales by assembling equipment into lots, with each separate lot sometimes containing 50 or more separate pieces of equipment. Prospective purchasers would then be required to bid on each collected lot and could not bid on particular items in a lot. Moreover, prospective purchasers were not afforded an opportunity to closely inspect all of the equipment in a lot177 prior to entering a bid. Petitioner was, at times, willing to purchase entire lots of equipment even under these unsatisfactory circumstances for two reasons. First, petitioner often found that the specialized types of equipment involved were difficult to acquire due to their scarcity. Second, due to the extensiveness of petitioner's rental business it expected that items in the lot could be used in this business either for rental purposes or as an inexpensive source of repair parts, and this generally proved to be the case. However, certain items infrequently proved adaptable for neither of the above purposes because of their character or condition. When petitioner discovered such items, it sold them. The following sales fall within this category: Depreciation orOther OrdinaryItem OfDateDateTotalIncome NotGain InEquipmentAcquiredSoldGainIn DisputeDisputeTwo-Drum Hoist197719773,3003,300Two-Drum Hoist197719773,3003,300Aluminum Pick19756/4/762828Aluminum Pick19769/1/76573522Aluminum Pick197510/13/761097732V Conceded Items178 Petitioner has conceded that gain from the sale of certain items of its equipment which it reported as capital gain for the years in issue should have been reported as ordinary income. The facts relating to these sales are nevertheless relevant in determining the overall character of petitioner's business and are therefore included herein. A. 38 Aluminum PicksIowa Public Service Company (hereinafter "Iowa"), one of petitioner's leasing customers, wanted to purchase aluminum picks 6 new. However, for unexplained reasons, Iowa was not able to purchase these items from their manufacturer.It was, however, able to rent this equipment and purchase it thereafter when the equipment was used. 6In order to accommodate Iowa, petitioner agreed to purchase these picks new, "rent" them to Iowa for a short period of time, and then sell them to Iowa at the end of the "lease" term. Thus, petitioner purchased these items, entered into short-term (four months or less) "lease" agreements with Iowa, and pursuant to the terms of these179 agreements Iowa was granted an option to purchase these items at specified prices with 80 percent (with respect to 36 of the picks) or 85 percent (with respect to two of the picks) of the "rental" payments to be applied to reduce the purchase price. These options were exercised by Iowa during petitioner's fiscal year ending 1976. B. 3 Portable Air CompressorsThese items were leased by petitioner to a company called Haven Bush. Although the equipment had not reached the end of its useful rental life, petitioner granted Haven Bush options to purchase these items under the lease. These options were granted at the insistence of Haven Bush. Pursuant to the terms of the lease, Haven Bush was entitled to purchase these items for specified amounts with 85 percent of the rent paid to be applied against the purchase price. It was highly unusual for petitioner to grant options under these circumstances. Haven Bush exercised these options during petitioner's fiscal year ending 1976. Petitioner now concedes that the gains it reported from the sales of items in subparagraphs A and B immediately above should be treated as ordinary income. The total amount reported by petitioner180 as long-term capital gain from these sales for its fiscal year ending 1976 was $11,435. C. Four Electric Spiders; Eight 2-man Spiders; Three 4,000 1b. Double Drum HoistsThese items were purchased new by petitioner at the specific request of Union Boiler Company, (hereinafter "union") one of petitioner's customers, for immediate "rental" to Union. Although petitioner already had these items of equipment in its rental fleet, Union, for business reasons, was unwilling to lease used equipment. To accommodate Union, petitioner purchased these items and, since it did not need these duplicate items in its rental fleet, petitioner immediately "rented" this equipment to Union under an agreement whereby the ownership of this equipment would pass to Union upon its making ten consecutive monthly payments to petitioner. During petitioner's fiscal year ending 1977, the ten monthly payments with respect to these items were completed and ownership was therefore transferred by petitioner to Union. Petitioner reported $18,350 of the gain from these transactions as long-term capital gain but now concedes said gain should have been reported as ordinary income. * * In the statutory181 notice of deficiency, respondent determined that all of the gain from sales of assets from petitioner's rental fleet which was reported by petitioner as long-term capital gain should have been reported as ordinary income. This determination was based upon respondent's conclusion that all of the property comprising petitioner's rental fleet was held by petitioner primarily for sale to customers in the ordinary course of its trade or business. OPINION The sole issue in this case is whether the gain realized by petitioner from the sale of various items of equipment during its fiscal years ending May 31, 1976, and May 31, 1977, should be treated as ordinary income or capital gain. The parties agree that the assets here concerned did not qualify as "capital assets" under section 1221 because they were depreciable assets used in petitioner's trade or business. 7 The resolution of the issue in dispute herein depends upon whether the gain from the sale of petitioner's assets can be considered capital gain under the provisions of section 1231. 182 Section 1231(a) generally provides that net gains from the sale and involuntary conversion of "property used in a trade or business" shall be treated as capital gains, 8 even though said property does not qualify as "capital assets" under section 1221. For purposes of section 1231, "property used in a trade or business" is defined in section 1231(b) which, as applicable to the years in issue, provided in pertinent part: (b) Definition of Property Used in the Trade or Business.--For purposes of this section-- (1) General rule.--The term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not-- * * * (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, * * * Respondent does not dispute that the assets petitioner reported as having generated long-term capital gain were held by petitioner for the requisite six-month holding period. 9 Respondent does contend, however, 183 that petitioner held these assets "primarily for sale to customers in the ordinary course of his business" within the meaning of section 1231(b)(1)(B), and therefore maintains that all of the gain in dispute should be treated as ordinary income. 10184 Petitioner, on the other hand, argues that, except for certain conceded items, its equipment was held primarily for lease and not for sale to customers in the ordinary course of its trade or business. Petitioner therefore contends that it is entitled to favorable capital gains treatment with respecr to all of the gain remaining in dispute pursuant to the general allowance of section 1231(a). Whether property is held by a taxpayer "primarily for sale to customers in the ordinary course of business" is purely a factual question, S & H, Inc. v. Commissioner,78 T.C. 234">78 T.C. 234 (1982); Byram v. United States,705 F.2d 1418">705 F.2d 1418 (5th Cir. 1983), and petitioner bears the burden of proving that its property was not so held. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Moreover, the Supreme Court has clearly stated that when making this factual determination, the word "primarily" is to be afforded its ordinary, everyday meaning of "principally" or "of first importance." 11Malat v. Riddell,383 U.S. 569">383 U.S. 569, 572 (1966). 12 This literal construction of the statute is consistent with the purpose of the capital gains provisions185 which, is stated by the Supreme Court, were intended to: * * differentiate between the "profits and losses arising from the everyday operation of a business" on the one hand ( Corn Products [Refining] Co. v. Commissioner,350 U.S. 46">350 U.S. 46, 52) and "the realization of appreciation in value accrued over a substantial period of time" on the other. ( Commissioner v. Gillette Motor [Transport] Co.,364 U.S. 130">364 U.S. 130, 134). [Malat v. Riddell,supra at 572] See also S & H, Inc. v. Commissioner,supra;McManus v. Commissioner,65 T.C. 197">65 T.C. 197 (1975), affd. 583 F.2d 443">583 F.2d 443 (9th Cir. 1978), cert. denied 440 U.S. 959">440 U.S. 959. 186 Thus, unless petitioner held the property here in issue principally for sale in the ordinary course of business, said property will not be excluded from the category of property to be afforded capital gain treatment under section 1231(a) because of section 1231(b)(1)(B). Once this black-letter rule is stated, however, it must be tempered by an acknowledgment that each individual case in this area of the law must be considered and evaluated on its peculiar and particular facts. Compare R. E. Moorhead & Son, Inc. v. Commissioner,40 T.C. 704">40 T.C. 704 (1963) and Latimer-Looney Chevrolet, Inc. v. Commissioner,19 T.C. 120">19 T.C. 120 (1952). The particular facts presented in this case make resolution of the disputed issue especially difficult. Petitioner's leasing business was an ongoing enterprise which required that sales be made on a rather frequent and recurring basis as petitioner's equipment was lost or damaged by the lessee or as such equipment became obsolete or otherwise useless to petitioner's rental business (Category I and II Sales). Additionally, certain business exigencies dictated that petitioner sell certain items of equipment that had not yet reached187 the end of their useful rental lives during the years in issue (Category III Sales). Moreover, petitioner sold certain other items which cannot fairly be placed in the above categories (Category IV Sales). Finally, the gains derived from the sales in question, although not the primary source of petitioner's business income during the years in issue, were not insubstantial. As a threshold matter, it is important to point out that petitioner does not contend that it did not hold any assets primarily for sale in the ordinary course of business. It is apparent from the record that any such contention would be completely without merit. Petitioner's income tax returns disclose that it carried certain assets in inventory and it is therefore clear that petitioner conducted a sales as well as a leasing business. Petitioner acknowledged such on its returns when it listed its business activities as "sales, servicing and leasing construction equipment." Moreover, petitioner has conceded that certain items of equipment which it originally characterized as section 1231 assets were, in fact, held by petitioner primarily for sale to customers in the ordinary course of its business. Petitioner188 admitted on brief that these conceded items "did not constitute items that were acquired by petitioner and held by petitioner in its equipment rental fleet," and should therefore have been placed in its sales inventory from the outset. The fact that petitioner held an inventory of assets for sale in the ordinary course of business does not, however, end the inquiry, for a taxpayer may hold some assets for sale and other similar assets for use in its trade or business. See Latimer-Looney Chevrolet, Inc. v. Commissioner,supra;A. Benetti Novelty Co. v. Commissioner,13 T.C. 1072">13 T.C. 1072 (1949). 13 Petitioner argues such is the case here, and that the assets we have found as comprising petitioner's rental fleet were acquired and held by petitioner primarily for rental, and not for sale. The sales of its rental equipment, petitioner says, were merely necessary incidents to the conduct of its rental business and not petitioner's predominant motive in acquiring and holding these assets. Implicit in this contention is that the rental business was separate, and independent of the sales of inventory items. 189 Respondent does not quarrel with the implicit premise in petitioner's position that petitioner operated a substantial rental business independently of its sales of inventory items. Respondent would, however, characterize petitioner's rental business, and, by necessary inference, the purpose for which petitioner held the assets used in that business, quite differently than would petitioner. Pointing to the facts outlined above, respondent contends that the record demonstrates that petitioner did not just operate a rental business with respect to the assets in its rental fleet. Rather, respondent maintains that petitioner operated both a rental and sale business with respect to such assets and that petitioner held such assets for the dual purpose of rental and sale. As such, respondent argues that these assets should be deemed to have been held by petitioner primarily for sale to customers in the ordinary course of its trade or business. Respondent relies principally upon the analysis contained in International Shoe Machine Corp. v. United States,491 F.2d 157">491 F.2d 157 (1st Cir. 1974), cert. denied 419 U.S. 834">419 U.S. 834. We cannot agree with respondent's analysis190 of the facts, nor with the legal conclusions he would have us draw therefrom. In determining whether the section 1231(b)(1)(B) exclusion from capital gains treatment is met, the purpose for which the property is held is the controlling factor. S.O. Bynum v. Commissioner,supra;Kirk v. Commissioner,47 T.C. 177">47 T.C. 177 (1966); McCullough Transfer Company v. Commissioner,27 T.C. 822">27 T.C. 822 (1957); A. Benetti Novelty Co. v. Commissioner,supra;Latimer-Looney Chevrolet, Inc. v. Commissioner,supra.The fact that assets are ultimately disposed of by sale is not necessarily decisive of this question. See, e.g., Hillard v. Commissioner,281 F.2d 279">281 F.2d 279 (5th Cir. 1960); Philber Equipment Corp. v. Commissioner,237 F.2d 129">237 F.2d 129 (3th Cir. 1956); McCullough Transfer Company v. Commissioner,supra;Kirk v. Commissioner,supra.Cf. Grant Oil Tool Co v. United States,180 Ct. Cl. 620">180 Ct. Cl. 620, 381 F.2d 389">381 F.2d 389 (1967). Rather, the taxpayer's intent in acquiring the property, his reason for holding the property, the relationship of the property191 to petitioner's trade or business and the extent of its use must be examined and weighed. We think respondent, by focusing on the mere fact that petitioner sold equipment from its rental fleet which generated income to petitioner that was not insubstantial, when compared to its leasing receipts, fails to paint a complete picture and thereby misconstrues the essence of petitioner's leasing business. Petitioner has presented credible, unrefuted evidence that all of the assets comprising its rental fleet were acquired for the specific purpose of rental, and that it was petitioner's established policy not to sell rental items as long as they remained in rentable condition. Moreover, the record clearly shows that except with respect to a certain few assets (discussed infra), petitioner's original purpose in acquiring these assets was never departed from. The facts surrounding the various sales in issue demonstrate that such sales were not inconsistent with petitioner's conduct of a rental business. To the contrary, petitioner's acquisition, use and even its ultimate disposition of the equipment in issue (again, except with respect to certain assets discussed infra) had as their192 primary purpose the operation of a rental, and not a sale business. Initially, we find respondent's attempt to derive support for his contention that petitioner held the assets comprising its rental fleet primarily for sale, or for the dual purpose of rental and sale, from the facts of the sales denominated as Category I sales in our findings, to be unwarranted. Because of the nature of the projects on which petitioner's rental equipment was used, petitioner expected that certain of its assets would be lost or damaged by the lessee and petitioner therefore had an established policy which required the lessee to reimburse petitioner for such items. However, these "sales" 14 were, from the perspective of petitioner, unwanted and unavoidable occurrences over which petitioner exercised no control. Such sales certainly cannot be taken as evidence that petitioner held all of its rental fleet assets primarily for sale, or even for the dual purpose of sale and rent. 193 Moreover, the sales falling within this category, and the gains generated therefrom, were relatively insignificant when compared to petitioner's leasing activity. Petitioner sold only two items of its equipment during its fiscal year ending May 31, 1976, as the result of the loss or destruction by the lessee.Only 13 sales falling within this category were made during petitioner's fiscal year ending May 31, 1977. Only $746 of the gain in issue in this case for petitioner's fiscal year ending May 31, 1976, is attributable to these transactions, while only $1,706 of the gain in issue for petitioner's fiscal year ending May 31, 1977, is attributable to said transactions. The Category I sales were thus clearly not, in and of themselves, "of first importance" to petitioner's business. Malat v. Riddell,supra.Cf. Grant Oil Tool Co. v. United States,supra.Secondly, the vast numerical majority of sales from petitioner's rental fleet which occurred during the years in issue were sales which we have classified as Category II sales in our findings. These sales were of items which we have found had, prior to sale, been used by petitioner extensively194 for rental purposes, or otherwise utilized in petitioner's rental fleet. Respondent refers us to these sales and reminds us that frequency, continuity, and substantiality of sales are often taken as evidence that a particular taxpayer holds property primarily for the purpose of sale. Respondent additionally argues that the method petitioner utilized to effectuate these sales belies petitioner's contention that these items had ceased to be useful to petitioner's rental fleet at the time they were sold. More precisely, respondent points out that may of the items falling within this category were sold while out on lease to the then-current lessee, and questions how petitioner can argue that such items had reached the end of their useful rental lives when sold under such circumstances. Once again, respondent glosses over the totality of facts. Petitioner has established that its leasing business success was largely a function of its having established a reputation of providing to its customers only equipment which was in first-class working condition. In order to assure that this standard was met by items in its rental fleet, it was often necessary for petitioner to dispose of items195 before they were reduced to scrap value. Moreover, since petitioner often purchased used equipment for its rental fleet, the useful life of such equipment to the fleet was, at times, relatively short.These facts do not lead to a necessary inference that petitioner's principal purpose in acquiring and holding these assets was for sale. See Hillard v. Commissioner,supra;Philber Equipment Corp. v. Commissioner, supra;Latimer-Looney Chevrolet, Inc. v. Commissioner,supra.Petitioner has established through unrefuted testimony, which we found credible, as well as by documentary evidence, that each item we have placed within this category was used in its rental fleet prior to sale and, when sold, was no longer of a quality or character which could continue to be used in the fleet. The fact that petitioner often used current lessees as outlets for many of its obsolete items does not lead us to question the credibility of this unrefuted testimony, but to the contrary buttresses petitioner's assertion that it did not hold the assets falling within this category with the final gains from their sales as a determining business purpose. 196 Had this been petitioner's goal, it presumably would have utilized a well-organized sales force as well as more sophisticated marketing techniques. See Philber Equipment Corp. v. Commissioner, supra.Additionally, it is important that petitioner's rental fleet continually expanded in size despite the existence of these sales. On June 1, 1975, petitioner's rental fleet consisted of approximately 324 items and by July 31, 1977, consisted of 375 items. Thus petitioner was continually reinvesting the proceeds of these sales in an effort to maintain and augment an up-to-date fleet. On these facts, we conclude that the assets falling within Category II were held by petitioner primarily for use in its rental business and not for sale. Sales of worn-out or obsolete items were simply the natural conclusion of the equipment rental cycle, and not the primary purpose for petitioner holding these items. See Hillard v. Commissioner,supra;Philber Equipment Corp. v. Commissioner,supra. Cf. Kirk v. Commissioner,supra;Latimer-Looney Chevrolet, Inc. v. Commissioner,supra.Respondent continues197 to protest that other evidence of record demonstrates that petitioner's primary purpose in holding all the assets comprising its rental fleet was for sale. In particular, respondent points to certain sales (denominated as Category III sales in our findings), which were neither dispositions of old or obsolete items, nor the result of the loss or destruction of petitioner's rental equipment by the lessee. Most of these sales were of items with respect to which petitioner had granted options to purchase. From these facts, respondent would have us conclude that petitioner held not only these particular assets, but all of the assets in its rental fleet for the primary purpose of sale. Once again, respondent does not present a complete picture. When the facts surrounding the Category III sales are examined, it becomes clear that any inference that petitioner held these and all other assets in its rental fleet primarily for sale would be unwarranted extrapolation. In the first place, sales of this type were infrequent, nonrecurring transactions. Petitioner sold no assets falling within this category during its fiscal year 1976. Only 11 such sales occurred during petitioner's fiscal198 year 1977. Prior to petitioner's selling these assets, they were used as rental items. More importantly, all but one of the sales falling within this category were made, or options to purchase which resulted in these sales were granted, under threat of one of petitioner's valued rental customers to discontinue business if petitioner refused. Indeed, in each instance, the ultimate purchasers of these assets made previous requests to purchase (or for petitioner to grant options to purchase), unaccompanied by threat to discontinue their leasing business with petitioner, which petitioner refused.Moreover, the options to purchase which resulted in nine out of 11 of the sales falling within this category, were granted only after the lessee, Babcock and Wilcox, represented to petitioner that such options were merely formalities which would probably not be exercised. The sale by petitioner of the 200-ton guy derrick and hoist, although not made under threat by petitioner's customer to cease doing business with petitioner, was nonetheless precipitated by other compelling factors. Petitioner had no space to store this extremely large item of equipment and was therefore forced to dispose199 of it promptly. In making a determination of the principal purpose for which property is held, the intent of the taxpayer is of prime importance and decisions of this nature simply cannot be made in vacuo. Although it is a mere truism to say that nobody sells without an intent to sell, this alone cannot be determinative of the purpose for which property is principally held. Philber Equipment Corp. v. Commissioner,supra;Hillard v. Commissioner,supra;McCullough Transfer Company v. Commissioner,supra;Kirk v. Commissioner,supra. Holding property primarily for the purpose of sale implies a reasonably free choice to sell, combined with substantial selling activities. While exigencies of business sometimes require one to turn to some extent to selling certain assets, it is the nature of the impetus to sell, 15 as well as the degree of sale activities which are relevant in resolving the present issue. 200 As the facts summarized above suggest, petitioner's sales of Category III assets were not precipitated by any generalized intent of petitioner to change the purpose for which these assets were acquired (i.e., for lease). Rather, these sales represented an unwilling abandonment of petitioner's objective to realize rental income from these items dictated by the necessities of the circumstances. As we view it, petitioner was thus compelled to liquidate its investment in these assets. Moreover, since petitioner succumbed to this outside pressure only infrequently, we find respondent's attempt to attribute to petitioner the general purpose to sell all assets in its rental fleet a case of stretching the argument farther than it will reach. Petitioner acquired the assets in its fleet solely for the purpose of lease and not for sale. With respect to the assets we have denominated as Category I, II and III assets, petitioner's original purpose in acquiring these assets was to hold them until such assets were rendered useless for rental purposes due to their age or obsolescence. It would, of course, be the height of naivate to assume that petitioner, a company in the business of renting201 specialized construction equipment, did not realize that at some point it would be required to sell some of the assets comprising its fleet. The recognition of this possibility by petitioner was, however, not the primary purpose for petitioner's holding these assets. Accordingly, we have found that the assets denominated as Category I, II and III assets in our findings were not held by petitioner primarily for sale to customers in the ordinary course of business and, with respect to the gain generated by the sales of these assets and reported by petitioner as long-term capital gain or loss, we hold for petitioner. Respondent's reliance upon holdings of such cases as International Shoe Machine Corp. v. United States,supra and Recordak Corporation v. United States,163 Ct. Cl. 294">163 Ct. Cl. 294, 325 F.2d 460">325 F.2d 460 (1963), is misplaced. These cases address factual situations where a taxpayer holds all of its property for the dual purpose of both rental and sale and the conclusions reached in these cases are premised upon such a finding of dual purpose. Thus, in International Shoe Machine Corp. v. United States,supra, District Court specifically202 found: When customers expressed an interest in purchasing the machine that they were leasing, plaintiff did not simply say, "We do not sell our machines." * * Plaintiff adopted a policy of selling * * . The policy was simply to sell if the customer insisted on buying, despite company's preferences. The customer did not have to threaten to sue plaintiff or to take his business elsewhere unless plaintiff sold. [369 F. Supp. 588">369 F. Supp. 588 at 591 (D. Mass. 1973)]. In Recordak Corporation v. United States,supra, the Court of Claims specifically found that the taxpayer held all of its property for sale or rent, whichever the customer preferred. The Court, in distinguishing certain rental-obsolescence cases, stated: These were automobile and truck rental cases in which the courts held or assumed that the taxpayers' business was the rental business and not the dual business of both selling and renting to customers. Recordak does not fall within that class: all of its equipment was available for sale or rental to its customers * . [325 F.2d at 463] Where a taxpayer holds property for the dual purpose of rental or sale, the above203 cases recognized that it would be contrary to the legislative purpose underlying the capital gains provisions to allow capital gain treatment when the assets are sold. That is not the case here, however.Petitioner acquired the assets comprising its rental fleet for the primary purpose of lease. With respect to assets we have denominated as Category I, II and III assets, this purpose was not departed from by petitioner. The sales of such assets were merely necessary incidents to petitioner's rental business. Accordingly, we reject respondent's attempt to draw support from this line of cases. On category of assets remains to be considered -- those assets we have denominated in our findings as Category IV sales. For the reasons stated hereinafter, we find that these assets were held by petitioner primarily for sale to customers in the ordinary course of its trade or business within the intendment of section 1231(b)(1)(B). Initially, it appears that two Wacker compactors and the two ten-ton trolleys, denominated in our findings as paragraphs IV A and B, respectively, were acquired by petitioner for the primary purpose of sale, like the items petitioner has conceded should have204 been included by petitioner in its inventory rather than its rental fleet. However, since these items generated none of the gain in dispute, they need not be considered further. With respect to the remaining assets falling within this category, petitioner purchased these assets intending to use them in its rental fleet. However, petitioner was unable to inspect these assets prior to acquiring them. After it did inspect these assets, petitioner found that, because of their character, they were not useable as rental items, and therefore, sought to dispose of them by sale. These assets were thus never employed by petitioner for use in its rental fleet. It is clear that although petitioner did not acquire these assets with intent to sell them, petitioner's purpose in holding these assets was altered and subsumed by its desire to sell when it became clear that they could not be used and were not used, in petitioner's rental fleet. Unlike the assets we have denominated as Category I, II and III assets in our findings, petitioner did not intend to hold these assets for rental use over their reasonably determinable lives. Contrast Moorhead & Son, Inc. v. Commissioner,supra,205 with Latimer-Looney Chevrolet, Inc. v. Commissioner,supra.These assets must therefore be deemed to have been held by petitioner primarily for sale in the ordinary course of its trade or business. 16 With respect to the gain generated by the sale of these assets, which was reported by petitioner as long-term capital gain, we therefore hold for respondent. To reflect the foregoing, Decision will be entered under Rule 155.Footnotes1. All section references herein are to sections of the Internal Revenue Code of 1954, as amended and in effect during the years in issue. All references to Rules are to the Tax Court Rules of Practice and Procedure.↩2. It is apparent from the record that, in addition to conducting a leasing business, petitioner also conducted a sales business to some extent.Petitioner's fiscal 1976 and 1977 Federal income tax returns disclose that petitioner held certain assets in inventory and these items presumably were items of construction equipment since petitioner listed its business activity as "sales, servicing and leasing construction equipment" on both its fiscal 1976 and 1977 returns. Additionally, petitioner's concessions with respect to certain items of equipment, was to the effect that these items were mistakenly placed by petitioner in its rental fleet on its books and should instead have been treated as inventory items. Respondent does not suggest, however, that the assets referred to herein as comprising petitioner's "rental fleet" or "fleet" were, when acquired, properly includable by petitioner in its inventory. In fact, the parties have stipulated that such assets were depreciable assets, which is inconsistent with such a proposition. See sec. 1.167(a)-2, Income Tax Regs.↩ It is therefore apparent that petitioner's sale of inventory items and its conduct of its leasing business were independent aspects of petitioner's overall enterprise, and assets referred to herein as comprising petitioner's "rental fleet" or "fleet" include only those assets acquired by petitioner for the specific purpose of use in the conduct of its leasing activities.3. The precise percentage of the amounts reported by petitioner as gross receipts which constituted receipts from petitioner's leasing activities is not clearly disclosed in the record. As noted in footnote 2, supra,↩ petitioner also derived gross receipts from the sale of certain nondepreciable assets from inventory, and it is not disclosed what portion of petitioner's overall gross receipts was made up of receipts from the sales of these items. However, petitioner's tax returns disclosed that its total cost basis in its inventory items during its fiscal years ending 1976 and 1977 were $202,053 and $112,356, respectively, including beginning inventory plus merchandise purchased for sale during the year.Petitioner's ending inventories for its fiscal years ending 1976 and 1977 were reported as $26,153 and $30,243, respectively. Thus, even assuming petitioner placed a large markup on its inventory items, ite gross receipts from its leasing activities are nonetheless properly characterized as substantial.4. Some of the dates petitioner acquired its numerous rental assets is not disclosed in the record. We note, however, that respondent does not contend that petitioner failed to meet the holding period requirement of sec. 1231 with respect to any asset reported by petitioner as generating long-term capital gain.↩5. The following explanatory symbols are used: Those items marked with an asterisk "" were items that were sold while on lease under petitioner's standard rental agreement; those items marked with a "+" were items which were sold from petitioner's warehouse when they were under no lease agreement; the item marked with a "#" is the item that was sold pursuant to the "rental purchase agreement," and; the item marked with an "o" is the item that was purchased pursuant to an option granted by petitioner.↩6. "Picks" is apparently a term of art in petitioner's industry. The layman's description would be scaffolding and catwalks or movable platforms.↩7. This type of asset is specifically excluded from capital asset characterization by sec. 1221 which provides in relevant part: SEC. 1221. CAPITAL ASSET DEFINED. For purposes of this subtitle, the term "capital asset" means property held by the taxpayer, * * but does not include -- * * * (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167 * * *.↩8. As in effect during the years in issue, sec. 1231(a) provided: (a) General Rule.--If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For purposes of this subsection -- (1) in determining under this subsection whether gains exceed losses, the gains described therein shall be included only if and to the extent taken into account in computing gross income and the losses described therein shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply; and (2) losses (including losses not compensated for by insurance or otherwise) upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of (A) property used in the trade or business or (B) capital assets held for more than 6 months shall be considered losses from a compulsory or involuntary conversion. In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any property used in the trade or business or of any capital asset held for more than 6 months, this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions. ↩9. It is necessary to point out that certain assets referred to herein as comprising petitioner's rental fleet failed to meet the definitional requisites for section 1231 treatment since they were not held by petitioner for more than six months. However, petitioner did not include the gains or losses from the sale of asserts held for less than six months in the section 1231 netting process in arriving at its total long-term capital gains reported from sales of its depreciable assets. Rather, petitioner reported the gains and losses from the sale of these items as ordinary gain or loss, separately from its section 1231 net gains. Respondent does not contest the propriety of petitioner's treatment of these gains and losses. Any reference to such assets herein is solely for purposes of drawing a clear picture of petitioner's overall business activities, and should not be taken as an indication that the gain petitioner realized from these sales qualified for section 1231 treatment. ↩10. Respondent's failure to contest the validity of depreciation claimed with respect to the assets in issue is not necessarily inconsistent with his primary contention herein. Although property that is subject to an allowance for depreciation cannot simultaneously be held primarily for sale in the ordinary course of business, (see sec. 1.167(a)-2, Income Tax Regs.↩), the exclusionary clause of sec. 1231(b)(1)(B) may apply to property that was formerly used in a trade or business, but was converted subsequently to being held primarily for sale.11. In so holding, the Supreme Court specifically rejected a construction, urged upon the Court by the government, to the effect that a purpose may be "primary" if it is merely a substantial one. See Malat v. Riddell,383 U.S. 569">383 U.S. 569, 571↩ (1966). 12. Although Malat v. Riddell,supra, concerned the issue of whether property was held primarily for sale to customers for purposes of sec. 1221(1), the identical phrase appears in sec. 1231(b)(1)(B). Moreover, the Supreme Court in Malat emphasized that "the words of statutes - including revenue acts - should be interpreted where possible in their ordinary, everyday senses." See Malat,supra at 571. Accordingly, it is clear that the word "primarily" in sec. 1231(b)(1)(B) must be afforded the same meaning that the Supreme Court afforded to that word in the context of sec. 1221(1). See Hollywood Baseball Association v. Commissioner,423 F.2d 494">423 F.2d 494 (9th Cir. 1970), affg. 49 T.C. 338">49 T.C. 338 (1968), cert. denied 400 U.S. 848">400 U.S. 848; S & H Inc. v. Commissioner,78 T.C. 234">78 T.C. 234 (1982); S.O. Bynum v. Commissioner,46 T.C. 295">46 T.C. 295↩ (1966).13. See also Browning et al. v. Commissioner,9 T.C.M. (CCH) 1061">9 T.C.M. 1061↩ 19 P-H Memo T.C. par. 50,285 (1950).14. Both of the parties treat the transactions falling within this category as sales. We note however that these transactions are more properly characterized as involuntary conversions rather than sales since petitioner simply charged its lessee for loss or damage to these assets. See Grant Oil Tool Co. v. United States,180 Ct. Cl. 620">180 Ct. Cl. 620, 381 F.2d 389">381 F.2d 389↩ (1967). In any event, the semantic distinction is uimportant in the context of this case. See sec. 1231(a).15. See, e.g., Dawson v. Thomas, an unreported decision, 43 AFTR 1264, 51-1 USTC par. 9351 (N.D. Tex. 1951), where the Court held that a taxpayer that rented machines pursuant to contracts which contained options to purchase or recapture clauses, did not hold its equipment primarily for sale since the taxpayer's customer, the U.S. government, required those clauses. See also, Desilu Productions, Inc. v. Commissioner,T.C. Memo. 1965-307; S. P. McCall v. Commissioner,T.C. Memo. 1954-33↩.16. It is clear that petitioner's ordinary course of business included sale of certain assets since petitioner carried an inventory of items specifically for sale.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620890/	ADASKIN-TILLEY FURNITURE CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Adaskin-Tilley Furniture Co. v. CommissionerDocket No. 5530.United States Board of Tax Appeals6 B.T.A. 316; 1927 BTA LEXIS 3543; February 26, 1927, Promulgated 3543 Petitioner and Flint-Adaskin Co. were not affiliated during 1920. Roger T. Clapp, Esq., and Frederick W. Tillinghast, Esq., for the petitioner. M. N. Fisher, Esq., for the respondent. MORRIS316 This is a proceeding for the redetermination of a deficiency of $2,611.21 in income and profits tax for 1920. The question presented is whether the petitioner and the Flint-Adaskin Furniture Co. were affiliated during 1920. FINDINGS OF FACT. Herman Adaskin, merchant and resident of Springfield, Mass., conceived the idea of a chain of retail furniture stores. His initial step in establishing the chain was the purchase of the assets and business of John Tilley & Co., in Holyoke, Mass. On September 8, 1919, he incorporated this business, under the laws of Massachusetts, as the Adaskin-Tilley Furniture Co., Tilley being treasurer and a stockholder of the new corporation. Adaskin exchanged the assets which he had purchased for all of the stock of the corporation, consisting of 1,500 shares of preferred and 1,000 shares of common stock. Only the common stock had voting rights. Adaskin raised additional capital by selling the preferred stock, 3544 giving some common stock as a bonus, but retaining the majority of the common stock to assure himself of control of the corporation. On December 5, 1919, the Flint-Adaskin Furniture Co., a Rhode Island corporation, was organized to operate a retail furniture business in Providence, R.I. This corporation, the second unit in Adaskin's chain, was organized to take over the assets and business of Flint & Co., Inc., and the Anthony Furniture Co., both doing 317 business in Providence. Adaskin was issued all the preferred stock amounting to 1,155 shares, and 1,306 out of 2,381 shares of the common stock. As in the case of the petitioner, voting rights were limited to the common stock. The preferred stock was sold to raise additional capital, Adaskin retaining sufficient common stock to have a majority. Adaskin added additional units to his chain by establishing stores at New Haven, Conn., two at Fall River, Mass., an additional store in Holyoke, Mass., and one at Worcester, Mass. These stores were all acquired by the Adaskin system, which has been outlined as to the Adaskin-Tilley and the Flint-Adaskin companies, which are the only companies here involved. In acquiring3545 each of his units, Adaskin agreed to purchase only upon condition that he should have explicit control of every phase of the business. If a preliminary understanding of this nature was not obtainable, Adaskin would cease negotiations for the business. From the beginning of the two corporations in question Adaskin inaugurated an entirely different policy of doing business. He installed standardized forms, equipment, and methods of selling, buying and delivery. A new accounting system was installed so that books and records would be kept the same in each store. He increased advertising, placed floor men in each store to direct the customers to the different departments, placed his salesmen on a commission basis, dictated the lines of merchandise to be carried and the amounts, approved or rejected lines of merchandise suggested by the buyers of the store, compared the monthly statements of the store managers, and checked up on discrepancies either as to store, department or personnel. He insisted on interchange of merchandise and trade acceptances; he named the officers and directors, arranged for loans from the bank and credits from the factories. He was president of both companies. 3546 The stockholders and directors have never disputed or objected to the policies of Adaskin or his methods of conducting the business. There were no rival factions or dissenting stockholders. At only one meeting, and that a meeting of the Adaskin-Tilley Co., was there a stockholder present in addition to the necessary quorum. The stockholders' meetings merely elected directors and approved the acts of the directors. Proxies were sent out with the notices of annual stockholders' meetings, and these proxies were usually returned to Adaskin or Richard E. Smith. Smith was general manager of the Flint-Adaskin Co., and never objected to Adaskin's business policies or methods. He had been president and general manager of Flint & Co., Inc., and was the largest stockholder in the new corporation with the exception of Adaskin. 318 The common stock of the petitioner outstanding during 1920 was 1,000 shares. The common stock of the Flint-Adaskin Co. outstanding on January 1, 1920, was 2,401 shares, and on December 31, 1920, 2,413 shares. The following table shows the shares held by the principal stockholders, the changes during the year, and the percentage of holdings to the3547 total outstanding capital stock. Adaskin-Tilley Co.Flint-Adaskin Co.Stockholder.Year 1920.Shares.Per cent.Shares.Per cent.Jan. 188488.41,25652.3H. AdaskinDec. 3186486.41,23351.1Jan. 1404502T. P. TilleyDec. 31404502Jan. 153222.1Richard E. SmithDec. 3153222Jan. 133313.9J. Palmer BarstowDec. 3133313.8Jan. 1767.62309.7OthersDec. 31969.626511J. Palmer Barstow was treasurer of the Flint-Adaskin Co. Ninety-nine and 87 shares of that company were held as treasury stock on January 1 and December 31, 1920, respectively. The petitioner and the Flint-Adaskin Co. filed a consolidated return for 1920 in which a loss sustained by the latter company was taken as a deduction, and the capital items referable to that company were included in invested capital. The Commissioner determined that the companies were not affiliated, denied the loss claimed, and eliminated the capital items of the Providence company from petitioner's invested capital. OPINION. MORRIS: Section 240 (b) of the Revenue Act of 1918 provides in part3548 that two or more corporations shall be deemed to be affiliated if substantially all of the stock is owned or controlled by the same interests. In the present case, Adaskin and Tilley owned 90.4 per cent in the petitioner and 53.1 per cent in the Providence company during 1920. These percentages standing alone would not be sufficient to meet the requirement of "substantially all" laid down by the statute. ; . The petitioner, however, contends that, in addition to the stock owned outright by Adaskin and Tilley, the former controlled all of the minority stock of both companies. If, as a matter of fact, he controlled such additional stock, there would be no question that substantially all of the stock was owned or controlled by the same interests. 319 There is no doubt but that Adaskin had absolute control of the business methods, policies and relations of the two corporations. He dominated and managed the business of each. He settled questions of policy, expediency and methods of operation. He organized both corporations with the understanding that3549 he should have control of the business. We have heretofore held, however, in the , that the control "referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock." We further held in the , that "control of the business is not control of the stock of a corporation conducting a business, nor, where a minority of stockholders are present, even though quiescent, representing 27.04 per cent of the stock, can we hold that the stock owned or controlled by the parent company constitutes substantially all of such stock." In the , we used the following language: It is obvious that the two corporations constituted a single economic unit with an arbitrary assignment of profits to the phonograph company, which in fact employed no capital and was practically nothing but an order-soliciting department of the furniture company. But this alone is not necessarily sufficient to bring the corporations within the provisions of section 240(b) of the Revenue Act of 1918. 3550 The petitioner attempts to show control of the voting stock by the facts that Smith and Barstow, the owners of approximately 22 and 14 per cent, respectively, of the stock of the Flint-Adaskin Co., were subject to discharge without notice by Adaskin, that Smith and Barstow had worked harmoniously and had never interfered or objected to the business policies or methods of Adaskin, and that the minority stockholders, other than Smith or Barstow, never attended stockholders' meetings or attempted to exercise their right to vote other than by certain proxies made out in favor of Adaskin and Smith. The fact that the stockholders worked harmoniously does not establish control of the stock of one by the other. . Barstow and Smith, who together owned approximately 36 per cent of the stock of the Flint-Adaskin Furniture Co., owned no stock in the petitioner and there is no showing that the other minority stockholders, owning 10 per cent additional, had any interest therein. To hold upon such facts that Adaskin controlled that stock by reason of his control of the business through a majority stockholding would, in our3551 opinion, lead to the inevitable conclusion that a bare majority stock holding, or even less than a majority, where the ownership is widely scattered, brings about an affiliation, a result which is inconsistent with the express wording of the statute that there must be 320 ownership or control of substantially all the stock. . The petitioner relies chiefly upon three decisions of the Board namely, ; , and . These cases are clearly distinguishable. In the first-named case, the same stockholders owned in excess of 90 per cent of the stock of two of the corporations involved and approximately 80 per cent of the other two. In the Midland, case, fifteen stockholders owned stock in both companies, their holdings amounting to approximately 80 per cent of both. In addition to the ownership of stock by the parent company in the Mahoning Coal Railroad Co. case in excess of 58 per cent and by the parent company and its officers and stockholders*3552 of 74 to 80 per cent, there were additional factors which influenced the decision in that case which are not present in the instant case. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620891/	Joseph Mansbach v. Commissioner, Sylvia Mansbach v. Commissioner.Mansbach v. MansbachDocket Nos. 6157, 6158.United States Tax Court1946 Tax Ct. Memo LEXIS 64; 5 T.C.M. (CCH) 924; T.C.M. (RIA) 46240; October 9, 194664 On the evidence, held, the fair market value on December 31, 1941 of 9.847 acres on which the Mansbach Metal Company, Inc. carried on its business was $29,541; and such corporation as of that date had no intangible asset value based on "good will". Carl Runge, Esq., and Richard D. Davis, Esq., Ashland, Ky., for the petitioners. Cecil H. Haas, Esq., for the respondent. LEECHMemorandum Findings of Fact and Opinion LEECH, Judge: These consolidated proceedings involve income tax deficiencies for the calendar year 1941, as follows: Joseph Mansbach$15,727.83Sylvia Mansbach10,846.87The contested issues are whether in determining the amount of the liquidating dividends received by petitioners on shares of stock of Mansbach Metal Company, Inc. upon dissolution in 1941, the respondent properly: (a) Added good will value to the assets; (b) Increased the value of 9.847 acres of land on which the corporation's business was conducted by $9,847, to the amount of $29,541. The case was submitted upon a stipulation of facts, oral testimony and exhibits. The stipulated facts are found as stipulated. Any additional facts are found from the record. 65 Findings of Fact Petitioners are husband and wife, residing at Ashland, Kentucky. Their separate individual income tax returns for the taxable year 1941 were filed with the collector of internal revenue for the district of Kentucky. In 1918, petitioners started the conduct of a business under the name of Mansbach Scrap Iron Company at Ashland. Joseph Mansbach drove a truck and collected metal scrap from mines located in Kentucky and West Virginia. His wife, Sylvia, had charge of the retail office and checked small quantities brought in by individual truckers. In 1927 a branch place of business was opened in Logan, West Virginia. J. T. Fish, a brother of Sylvia, was taken into the business and placed in charge of the branch. In 1933 the business was incorporated under the laws of Kentucky as Themansbach Metal Company, Inc. with a capital of $25,000. The capital stock was issued in exchange for the partnership assets, the corporation assuming the partnership liabilities. The assets transferred included "good will" evaluated at $6,914.05. Prior to 1934 the business was comparatively small, but in that year the company leased what was known as the Meredith property for a yard and66 installed a shearer to cut scrap metals. The business continued to expand. On April 24, 1940, the corporation purchased from the American Rolling Mill Company, its largest purchaser of scrap metal, a tract of land consisting of 9.847 acres for a consideration of $29,541, or at the rate of $3,000 per acre, at which amount the American Rolling Mill Company had carried the property on its books. This plot was located in Ashland north of and adjacent to the C. & O. railroad tracks and between them and the Ohio River. This purchase did not include riparian rights. Many permanent improvements were made on this land. A warehouse and office building were erected, 7,500 feet of railroad track were laid, a huge machine for compressing automobile bodies and drums into 2,500 pound bales was installed and three additional shearers and two locomotive trains were also installed. The nearest competitors having this compressing equipment for baling light metals, which could only be sold when so processed, are located in Louisville, Cincinnati and Columbus. As the business grew, the amounts of increased capital stock issued by the corporation were paid for mostly by petitioners from dividends and67 salaries received by them from the corporation. The following tabulation shows the capital, surplus, and net earnings, both before and after all Federal income and excess-profits taxes have been deducted, of the corporation for the periods stated: DateCapitalSurplusTotal12-31-35$25,000.00$17,826.49$ 42,826.4912-31-3650,000.0018,751.0568,751.0512-31-3770,000.0028,446.2398,446.2312-31-3870,000.0027,129.7297,129.7212-31-3970,000.0046,770.94116,770.9412-31-4090,000.0068,307.09158,307.0912-31-4190,000.0097,218.37187,218.37Total for 7 dates$769,449.89Average109,921.41Net EarningsAfterBeforeYearTaxesTaxes1936$35,973.14$41,574.11193729,695.1835,011.3819384,543.175,193.15193919,032.0722,084.07194035,106.9746,174.59194144,450.7684,174.55Total for 6 years$168,801.29Average28,133.55On August 1, 1941, petitioners executed seven separate trust agreements in which their children and one grandchild were named as beneficiaries, the corpora of which consisted solely of stock of Mansbach Metal Company, Inc. After the68 execution of these trust agreements there remained in the name of petitioner, Joseph Mansbach, 70 shares and in the name of petitioner, Sylvia Mansbach, 150 shares. Immediately prior to the dissolution of the corporation, it reduced the book values of several tracts of real estate, including the tract of 9.847 acres purchased April 24, 1940. The Mansback Metal Company, Inc. was dissolved on December 31, 1941. In the dissolution of the corporation the real estate occupied by it was conveyed by general warranty deed to Joseph Mansbach as trustee in liquidation for the Mansbach Metal Company and all of the other assets of the company were transferred by bill of sale to the Mansbach Metal Company, a partnership composed of Joseph Mansbach, J. T. Fish, Sylvia Mansbach, Joseph Mansbach, trustee for Sophia Mansbach, Gerald J. Mansbach and Samuel Mansbach, and Sylvia Mansbach, trustee for Hanna Mansbach Solomon, Minnie Rae Mansbach and Selma Mansbach. In both instruments of conveyance, the grantees assumed all liabilities and obligations of the corporation. On the same day, to wit: December 31, 1941, Joseph Mansbach, J. T. Fish, Sylvia Mansbach, Joseph Mansbach, trustee for Sophia Mansbach, 69 Gerald J. Mansbach and Samuel Mansbach, and Sylvia Mansbach, trustee for Hanna Mansbach Solomon, Minnie Rae Mansbach and Selma Mansbach, entered into a partnership agreement whereunder the partners agreed to engage in the scrap metal business for a period of 25 years under the firm name of "Mansbach Metal Company". The following is the balance sheet of the corporation as of December 31, 1941, immediately prior to its dissolution, as shown by its books, and the balance sheet as of that date after certain adjustments were made thereto by respondent: PerASSETSBooksAdjustmentsAdjustedCash$ 41,237.04$ 41,237.04Notes and Accounts Receivable59,540.0459,540.04Inventory43,572.4543,572.45Stocks, Corp.945.00945.00Machinery and Equipment123,414.55123,414.55Land25,644.00$ 9,597.0035,241.00Prepaid Ins.1,911.931,911.93Intangibles74,714.9074,714.90Total$296,265.01$84,311.90$380,576.91LIABILITIESAccounts Payable16,090.9416,090.94Notes17,000.0017,000.00Accrued Wages and Expenses7,139.25(749.45)6,389.80Accrued Misc. Taxes6,147.15(1,115.00)5,032.15Accrued Federal Income & Ex. Profits Taxes38,680.48824.1739,504.65Depreciation Reserve34,626.1034,626.10Capital Stock90,000.0090,000.00Surplus86,581.0985,352.18171,933.27Total$296,265.01$84,311.90$380,576.9170 After making the adjustments above set forth, the respondent determined the per share value of the stock of the corporation to be $291.04. In making such determination, the respondent adjusted the values of certain real estate, including the 9.847 acre plot, which respondent determined to be its cost price of $29,541, an increase of $9,847 over the book value. Respondent also determined the assets, as of December 31, 1941, had a good will or intangible value totaling $74,714.90. computed as follows: Average investment tangible assets$109,921.41Earnings computed at 12% attribu-table to tangible assets13,190.57Average earnings for period28,133.55Earnings attributable to intangibles$ 14,942.98Capitalized at 20%74,714.90The assets of the Mansbach Metal Company, Inc., as of December 31, 1941, had no intangible or good will value. The fair market value of the 9.847 acres of land in Ashland, on which the business of the corporation was carried on, was $29,541 as of December 31, 1941. Opinion Two distinct issues of fact are presented by this controversy. The first issue involves a determination of the fair market value, on December 31, 1941, of71 9.847 acres of land on which the business of the Mansbach Metal Company, Inc. was located; and the second issue presents the question as to whether "good will' value attached to the assets of such corporation on said date and, if so, its amount. Petitioners argue that the fair market value of the 9.847 acres on the critical date was $2,000 per acre, notwithstanding the fact that the corporation in April 1940 had paid at the rate of $3,000 per acre for the plot. Petitioners endeaver to support their contention by expert testimony. They assert with some vigor that the character of the experts offered is such that we should accept their testimony in the absence of any expert testimony offered by the respondent. We are impressed with the standing and reputation of petitioners' experts and, in the absence of other competent evidence, might accept it as furnishing as reliable a basis as our own judgment. The opinions of these experts varied as to value and ranged from $2,000 to $2,500 per acre. They, however, were unanimous in their respective view that the value of the land had not fluctuated in the last few years. Such testimony, we think, supports the respondent's contention that the72 fair market value of the lot was its cost price of $3,000 per acre. That is also the value at which the seller, at the time of the sale, carried the land on its own books. The general rule is that "fair market value" is the price at which property will change hands between parties neither of whom is under compulsion to trade and both knowing the facts. Petitioners suggest that the purchase was not an arm's length transaction since the corporation regarded the land as essential to its business and it could not jeopardize its relationship with its largest purchaser of scrap metal by attempting to negotiate the price rather than pay the price demanded. Assuming the presence of these factors, we think the transaction was an arm's length one, and that the price paid represented the then fair market value of the land. Since the price was that at which the property was carried on its books, the seller apparently took no advantage of its favorable position. Petitioners' evidence establishes the fact that the value of industrial property in that neighborhood did not fluctuate during the period in question. Upon all the evidence we have found as a fact that the fair market value of the 9.84773 acres, on December 31, 1941, was $29,541, and sustain the respondent on this issue. The remaining issue relates to the existence of good will as an asset, the value of which the respondent fixed at $74,714.90. Petitioners deny the existence of any intangible value. In support of their position petitioners offered the testimony of three expert witnesses who have been connected with the metal scrap business for long periods of time. Each witness expressed the opinion that the Mansbach Metal Company, Inc. had no good will value. All were acquainted with the operations of the corporation and knew petitioner, Joseph Mansbach, to whose industry, ability and reputation for fair dealing they ascribed the corporation's financial success. The testimony of these witnesses further established the fact that the metal scrap business is hazardous, and that in recent sales of such businesses in the neighborhood the price of each was fixed solely upon the value of the tangible assets. We do not deem it necessary to determine as a matter of law whether a scrap metal business is of such character that "good will" may or may not exist as an asset. We are convinced that upon the record made in this proceeding, *74 petitioners have established that the Mansbach Metal Company, Inc. had no intangible asset value as of December 31, 1941, and have so found as an ultimate fact. This issue is determined in favor of petitioners. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620893/	WOODROW LEE TRUST, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Woodrow Lee Trust v. CommissionerDocket No. 15563.United States Board of Tax Appeals14 B.T.A. 1420; 1929 BTA LEXIS 2943; January 18, 1929, Promulgated 2943 Held that the petitioner is an association for income-tax purposes. Don F. Reed, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. ARUNDELL1420 The petitioner in seeking the redetermination of a deficiency of $11,504.84 in income and excess profits taxes for the period from February 5, 1920, to December 31, 1920, inclusive, claims that the respondent erred in holding it to be an operating trust taxable as an association. FINDINGS OF FACT. On February 20, 1919, the trustees of the Woodrow Lee Oil Co., a joint stock association owning a certain lease for the production of oil and gas on a 2 1/2-acre tract of land situated in Wichita County, Texas, together with certain personal property located thereon, 1421 entered into a written agreement with Roberts & Hill, a copartnership, having as its members, W. H. Roberts and J. J. Hill, to drill three wells on the lease and to manage and operate the lease. The pertinent provisions of the agreement read as follows: Parties of the second part [Roberts & Hill] shall at their own cost and expense furnish the necessary derrick, casing, water, fuel, labor, rig, and all2944 and everything else reasonably necessary to drill and complete said wells. By "completion" as used in this contract is meant that parties of the second part shall drill said wells to the top of the sand, and shall, if necessary, cement the same and set the casing therein, and to bail said wells, and to see that said casing is properly set. Thereafter all expenses in the standardizing of said wells, the furnishing of pumps and equipment, tankage, pipe lines, and all other reasonable and necessary expense in drilling said wells shall be at the joint expense of the parties hereto, as follows: Parties of the first part shall pay one-third of all such expenses and parties of the second part shall pay two-thirds of all such expenses. It is further agreed that parties of the second part shall have the control and management of said wells and the operation, production, and marketing of oil therefrom, and all of the costs and expenses of operating said wells shall likewise be at the joint expense of the parties hereto, to wit: Parties of the first part to pay one-third of all such expenses, and parties of the second part two-thirds thereof. Parties of the second part shall keep an2945 accurate set of books as to all expenses and that are chargeable to the joint account of the parties hereto, and shall furnish to parties of the first part at reasonable times, once each thirty days an itemized statement of such expenses. In consideration of the drilling of said wells and the things to be done by parties of the second part, as above provided, it is agreed that parties of the second part shall have, own, and be entitled to one-half of seven-eighths, to wit, seven sixteenths, of all of the oil and gas produced and saved from said wells, and parties of the first part shall have a like seven-sixteenths of the oil and gas produced and saved from said wells. It is understood that the oil produced from said wells shall be run to the pipe line to the credit of parties of the second part, who shall from the proceeds of the sale of such oil repay themselves for any and all actual and necessary expenses chargeable to the joint account as above provided and thereafter parties of the second part shall immediately pay over to the parties of the first part the net proceeds of the sales of their seven-sixteenths of the oil. It is further provided, however, that parties of2946 the first part shall pay in cash their proportion, to wit, one-third of the Actual and necessary expenses chargeable to them as the same shall accrue, that is to say for all such expenses created prior to the production of sufficient oil from said wells to so pay such expenses, parties of the second part drawing on parties of the first part therefor. Prior to the execution of the agreement with Roberts & Hill, the Woodrow Lee Oil Co. started the drilling of well No. 1 on the lease. The drilling of this well was completed by Roberts & Hill at the sole expense of the owner before the trust agreement hereinafter referred to was executed. 1422 At a meeting held on January 21, 1920, the shareholders of the Woodrow Lee Oil Co. authorized the transfer of all of its assets, subject to its liabilities, to J. D. Avis, W. H. Roberts, and A. M. Liddell, subject to a trust agreement approved by them. The trust agreement approved by the shareholders and entered into with Avis, Roberts, and Liddell, on February 4, 1920, as trustees of the petitioner, reads as follows: STATE OF TEXAS, County of Wichita:KNOW ALL MEN BY THESE PRESENTS: THAT WE, J. D. AVIS, W. H. ROBERTS, 2947 J. S. NELSON, J. J. HILL and MARVIS LIDDELL, the present duly elected and qualified Trustees of the WOODROW-LEE OIL COMPANY, and acting herein as such Trustees under and by virtue of a resolution adopted by the shareholders of the WOODROW-LEE OIL COMPANY at a meeting of said shareholders duly and legally held on January 21, A.D. 1920, for and in consideration of the sum of TEN DOLLARS (10.00) and other valuable consideration to us in cash paid by J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL, the receipt of which is hereby acknowledged and confessed, have bargained, sold, transferred and assigned, and by these presents do hereby bargain, sell, transfer and assign unto the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL - the oil and gas lease and all of the leasehold interest and estate conveyed thereby now held by us as Trustees in and to the following described property, situated in the County of Wichita, State of Texas, towit: - The South one-half of the following described two and one-half acre tract out of the William P. B. Dubose Survey: BEGINNING at a point in the South Boundary line of the Clark 45 acre tract 1205 1/2 feet west of the Southeast corner of said tract: THENCE2948 in a Westerly direction 275 1/2 feet; THENCE in a Sougherly direction of 803 feet to the South Boundary line of a Cline tract; THENCE in an Easterly direction along the South Boundary line to the Southeast corner of a 10 acre tract transferred by Floyd E. Ard to E. Rockhill et al 275 1/2 feet; THENCE in a Northerly direction along the West line of the tract sold by Ard to Rockhill et al 777 1/2 feet to the place of BEGINNING, together with all of the personal property, improvements, oil and all and singular of all of the property of every kind and character heretofore belonging to the said WOODROW LEE OIL COMPANY, including money, accounts receivable, choses in action, rights, claims and demands, as well as real and personal property of every kind and character. TO HAVE AND TO HOLD the properties above described unto the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL forever, subject however, to all of the debts and demands of every kind and character now due or owing by the said WOODROW-LEE OIL COMPANY whether direct or contingent, and subject to the trusts, covenants and agreements hereinafter contained. The said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL, who will be hereinafter2949 styled TRUSTEES, by accepting and signing this instrument, declare and agree that they will and their heirs and successors shall hold said granted premises and all other funds and property at any time transferred to or received by the TRUSTEES hereunder for the purposes with the powers and subject to the provisions hereof, for the benefit of the Cestui Que Trusts, who 1423 shall be Trust Beneficiaries only, without partnership, associate or any other relation whatever Inter Sese, and upon the Trusts following: - 1st:In Trust to convert the same into money and distribute the net proceeds thereof among the persons at the time of such conversion holding and owning beneficial interests therein, as evidenced by the receipt certificates issued by the Trustees, as hereinafter provided; it being however, expressly understood and agreed that the Trustees may, in their uncontrolled discretion, defer or postpone such conversion and distribution, except that the same shall not be postponed beyond the end of twenty years from and after the date hereof. During such postponement and until such conversion, the interest of the Cestui Que Trust shall be considered for purposes of the2950 transmission and otherwise as personal property. 2nd:In Trust pending final conversion and distribution of said property, to manage and control the same, the Trustees having for such purposes and for all purposes of sale, lease, mortgage, exchange, improvement, and development, and any and other arrangements, contracts and dispositions of the Trust property, or any part thereof, all and as full discretionary powers and authority as they would have if they themselves were the sole and absolute beneficial owners thereof in fee simple. 3rd:In trust to collect and receive all rents, revenue and income from the property, and semi-annually, or oftener at their convenience, to distribute the net income to and among the several Cestui Que Trusts according to their respective fractional interests. The Trustees in this connection having full authority from time to time to use any funds on hand, whether received as capital or income, for purpose of repair, improvement, protection or development of the property held hereunder pending its conversion and distribution, it being, however, expressly understood and agreed that the income arising from the operations of this Trust2951 is not to be accumulated beyond a necessary reserve for repair, improvement, protection or development of the property held hereunder. The determinations of the Trustees made in good faith as to all questions as between capital and income shall be final. 4th:The said WOODROW-LEE OIL COMPANY, an unincorporate joint stock association, having determined to wind up its affairs and be dissolved without waiting for final cash sale of its property, this Trust is declared in favor and for the benefit of the present Shareholders of said WOODROW-LEE OIL COMPANY, according to their respective interests in said WOODROW-LEE OIL COMPANY, and to them or their assigns the Trustees shall issue proper receipt certificates, which certificates and all others which may be heretofore issued in exchange or substitution thereof shall be deemed parts hereof and conclusively evidence the ownership of respective interests in this Trust; and the Trustees shall from time to time on request (on surrender of the old) issue such new certificates as may be proper and necessary to evidence any new or subdivided interests. 1424 5th:The Trustees shall have the authority to borrow money and2952 fix the terms of any loans, and give any pledge, mortgage or other security which they may deem wise. No purchaser from or lender to the Trustees shall ever have any liability to the application of any proceeds. 6th:The Trustees may employ all such agents and Attorneys as they may think proper and find expedient and prescribe their powers and duties and shall not be personally responsible for any misconduct, errors or omission of such Agents or Attorneys employed and retained with reasonable care. 7th:The Trustees, at all times, shall keep full and proper books of accounts and records of their proceedings and doings, and shall at least annually, render account of the Trust to any beneficiary requesting the same. No Trustee serving hereunder shall have any liability, except for the results of his own gross negligence or bad faith. 8th:The Trustees shall be entitled to reimbursement and indemnification from the Trust property for all their proper expenses and liabilities, and shall be entitled at all times to the advice of Counsel, and it being contemplated that one of said Trustees shall be in active charge of the affairs of the Trust, said Trustee shall2953 be entitled to receive for his services the sum of $175.00 per month; the two remaining Trustees shall be entitled to receive the sum of $10.00 per annum each. The Trustees shall designate which one of them shall have direct charge of the Trust's affairs. 9th:Any Trustee hereunder may resign by written instrument, duly acknowledged and recorded in the Deed Records of Wichita County, Texas. Any vacancy in the office of Trustee, however occasioned, shall be filled by the remaining Trustee by an instrument in writing signed by him and assented to in writing by the holder or holders of a majority in amount of the Beneficial interests herein, such appointment to be in like manner recorded as in the case of resignations. 10th:The terms and provisions of this Trust may be modified at any time or times by instrument in writing, signed and acknowledged by the then Trustees, assented to in writing by a majority in interest of the Cestui Que Trusts and recorded in the Deed Records of Wichita County, Texas. 11th:The certificate in writing of the Trustees as any resignation from the office of Trustee hereunder, and as to the appointment of any new Trustee hereunder, 2954 and as to the existence or non-existence of any modifications hereof, may always be relied upon and shall always be conclusive evidence in favor of all persons dealing in good faith with said Trustees in reliance upon such certificates. 1425 12th:The title of this Trust fixed for convenience, shall be the Woodrow-Lee Trust, and the term "Trustees" in this instrument shall be deemed to include the original and all successor Trustees. At the end of twenty years and after the date hereof, the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL, or their successors, unless this Trust shall thereafter have been otherwise lawfully terminated, shall sell all of the property of every kind then held by them hereunder, and make equitable distribution of the net proceeds among the several persons then entitled. IN WITNESS WHEREOF the Trustees of the WOODROW-LEE OIL COMPANY, acting under the authority above set forth, have executed this instrument, and the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL to evidence their assent and acceptance of said Trust, have signed their names at Wichita Falls, Texas, this 4 day of February, A.D. 1920. The parties have stipulated that2955 the balance sheet of the Woodrow Lee Oil Co. at the time of the transfer, was as follows: AssetsCash$10,243.58Lease50,000.00Equipment16,199.44Accounts receivable, Humble Oil & Refining Co3,570.09Accounts receivable, Roberts & Hill2,815.13Deficit19,416.76Total102,245.00LiabilitiesCapital stock$70,000.00Reserved for income tax1,925.1Depletion reserved26,860.1Depreciation reserved3,459.7Total liabilities102,245.00The petitioner did not acquire any additional property. At a meeting held a short time after the trust agreement was filed, the trustees of petitioner elected A. M. Liddell, president of the board of trustees, J. D. Avis, general manager, and W. H. Roberts, field manager. The trustees did not meet again and the shareholders of the petitioner never held a meeting. A. M. Liddell never performed any service for petitioner as president of the board of trustees. J. D. Avis supervised the keeping of petitioner's books by a bookkeeper employed for that purpose; paid out on the first of each month to the beneficiaries of the trust so much of the earnings as were not necessary to meet the obligations payable during2956 the balance of the month; assisted Roberts in the making of contracts for the sale of oil produced on the lease, and gave the buyer of the oil division orders therefor. These duties did not differ in any material respect from the work performed by Avis as secretary and treasurer of the Woodrow Lee Oil Co. He never consulted the beneficiaries of the trust as a body concerning the amount of earnings to distribute. Roberts superintended the production of oil and gas on the lease. The firm of Roberts and Hill continued the management and operation of wells Nos. 2 and 3 on the lease under the contract of February 20, 1919, after the petitioner acquired the property. The 1426 firm's employees also handled the production of well No. 1 under the supervision of Roberts as a trustee of petitioner. The expense for managing and operating, and the revenue from, well No. 1, and wells Nos. 2 and 3, were kept separate. Roberts and Hill received all the income from the wells and paid all of the expenses incident to the operation of the lease. Once every month the firm rendered a statement to petitioner showing total receipts from the sale of oil and gas, and disbursements made in2957 managing and operating the lease, and after deducting its share of the net proceeds, remitted the balance to petitioner. As owner of well No. 1, petitioner ultimately paid all of the expenses of its operation and received all the income from it, except the royalty of one-eighth. Pursuant to the terms of the contract of February 20, 1919, petitioner received seven-sixteenths of the income from, and paid one-third of the operating expenses of, wells Nos. 2 and 3. The firm of Roberts and Hill received the balance of the income, except royalty rights, and paid the remainder of the expenses. Petitioner handled its receipts and disbursements, and kept its books, in the same manner as its predecessor had. The parties have stipulated that petitioner's gross income, and expenses, subject to an additional allowance for depletion, for the taxable period, were as follows: RevenueAmountProduction well No. 1$44,610.53Production wells Nos. 2 and 330,234.64Production, gas1,537.25Total76,382.42ExpensesAmountLabor$2,768.13Lease expense for shooting wells, etc2,511.70Repairs610.51Salaries2,500.00Taxes - Production, county and State1,684.21Insurance35.31Donations50.00General expense1,545.10Bad accounts34.33Depletion13,670.65Depreciation4,000.00Total29,409.94Net income46,972.482958 All of petitioner's property was sold August 1, 1925. Petitioner ceased to exist some time between August 1, 1925, and November 8, 1926. OPINION. ARUNDELL: In the case of , after a careful consideration of the authorities, particularly the cases of , and , we concluded that the question of whether a particular organization, such as the petitioner here, is a trust or an association for income-tax purposes should be determined by applying the double 1427 test of control, and doing business, especially the latter, the sole test of control not being sufficient. In , we again had occasion to consider the effects of the Crocker and Hecht decisions on questions of this character. In that proceeding we said at page 20: It thus appears that the court discards the test of control in determining whether such a trust is an association, under the revenue acts, and makes the test whether it was or was not organized for purely business purposes. This seems to be the true distinction. 2959 See also . The Hecht decision was interpreted in a similar manner by the Circuit Court of Appeals for the First Circuit in the case of , wherein it was said that: The measure of control over the trust vested in the beneficiaries does not seem to be the determining factor, but rather whether the trustees are conducting a business for profit or gain. Here the shareholders of petitioner gave the trustees very broad powers under the agreement of February 4, 1920, set out in full in our findings of fact. Pending the conversion of the property assigned to them for management and control into money, which was not to be deferred longer than 20 years, the trustees had, among other powers, unrestricted power (1) to not only collect and receive the income from the property, but to lease, mortgage, exchange, improve and develop the property; (2) to use any funds on hand, whether received as capital or as income, for the purpose of repairing, improving, protecting, or developing the property held by them, subject only to the condition2960 that the sum set aside as a reserve for such purposes should not exceed a necessary amount; (3) to borrow money; (4) to employ agents and attorneys, and (5) to fill any vacancy on the board of trustees and modify the declaration of trust, with the consent of a majority in interest of the shareholders. The powers thus voluntarily granted by the shareholders under the declaration of trust were broad enough to enable the trustees to carry on such a business as would necessarily follow from the active operation and development of oil and gas-producing land. That the trustees actually carried on a business enterprise for profit in a manner similar to corporate bodies, appers evident from the evidence before us. The trustees maintained and operated the lease, paying all of the cost of extracting oil and gas from well No. 1, which petitioner owned in its entirety, and their proportionate share of the upkeep and operating costs of wells Nos. 2 and 3, which had been drilled by Roberts & Hill under the contract of February 20, 1428 1919, and sold all of the oil and gas produced on the lease. The fact that the men who actually did the pumping, maintained the wells in operating condition, 2961 etc., were not employees of the trustees, but of the copartnership of Roberts & Hill, is immaterial, since the work was under the supervision of Roberts as a trustee of petitioner, and it eventually paid all or its share of the whole cost, depending upon which of the wells the expenditure was made. In the Durfee Mineral Co., case, it appears that the only act performed by the trustees was the leasing of the property held by them, yet we held the taxpayer to be an association for income-tax purposes. In , the court said that "a corporation owning and renting an office building is engaged in business within the meaning of an excise statute", citing , and . We are of the opinion that the shareholders were associated together in a manner similar to corporate bodies, for business purposes; that it did engage in business, and that it is taxable as an association. The petitioner is not asking us to apply any of the tests provided by section 704 of the Revenue Act of 1928 to determine its taxable status. We do not*2962 know when it filed its return for the taxable period or the date of the termination of its existence beyond the fact that it occurred some time between August 1, 1925, and November 6, 1926. Regulations 45, 65, and 69, one of which was in effect when petitioner was required by law to file a return or at the time it ceased to exist, do not appear to be contrary to our decision, and we have not been referred to any applicable ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue that is opposed to our conclusion. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620895/	KENNETH R. DUNWOODY, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentDunwoodyDocket No. 20229-90United States Tax CourtT.C. Memo 1992-721; 1992 Tax Ct. Memo LEXIS 765; 64 T.C.M. (CCH) 1556; December 21, 1992, Filed Decision will be entered under Rule 155. For Petitioner: Joe K. Gordon. For Respondent: Shelley D. Turner and William Mark Scott. DAWSONDAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: Respondent determined the following deficiencies in and additions to the Federal income taxes of Kenneth R. and Christy M. Dunwoody: 1Additions to TaxSec.Sec.Sec.YearDeficiency6653(a)(1)(A)6653(a)(1)(B)66611986$ 87,699$ 4,38550% of interest$ 21,92519878,759438due on the2,190deficiency766 Petitioner made some concessions. 2 The issues remaining for decision are: (1) Whether petitioner held certain parcels of land for sale to customers in the ordinary course of his trade or business within the meaning of section 1221(1); (2) whether petitioner's cutting horse activities were engaged in for profit within the meaning of section 183; (3) whether expenses incurred by Ross-McClain, Inc., petitioner's wholly owned corporation, constituted constructive dividends to him; (4) whether petitioner is liable for the additions to tax for negligence or intentional disregard of rules or regulations pursuant to section 6653(a)(1)(A) and (B) for 1986 and 1987; and (5) whether petitioner is liable for the addition to tax for substantial understatement of tax pursuant to section 6661 for 1986 and 1987. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation767 of facts and the attached exhibits are incorporated herein by this reference. BackgroundPetitioner Kenneth R. Dunwoody resided in Arlington, Texas, at the time he filed his petition. He and his former wife, Christy M. Dunwoody, timely filed joint Federal income tax returns for 1986 and 1987. Petitioner was a calendar year, cash basis taxpayer for the years in issue. He employed Robert Ray Brackeen, a certified public accountant, to prepare his personal Federal income tax returns. Mr. Brackeen also prepared the corporate tax returns of Ross-McClain, Inc. (Ross-McClain), petitioner's wholly owned corporation. On November 7, 1989, petitioner filed a voluntary petition for bankruptcy under chapter 7 of the Bankruptcy Code (11 U.S.C.) with the United States Bankruptcy Court, Fort Worth, Texas, Division. On March 15, 1990, he received a discharge in bankruptcy. I. The Real Estate Activities of Petitioner and Ross-McClainPetitioner began working in the homebuilding industry in the early 1970s. During the years in issue, he was the 100-percent shareholder of Ross-McClain, a corporation that was organized in approximately 1979. Ross-McClain was involved in buying768 and developing real property for residential use purposes, such as home construction. Ross-McClain based its taxable year on a fiscal year beginning April 1 and ending March 31, and utilized the accrual method of accounting. Ross-McClain's records with respect to its home construction business were maintained in a businesslike manner. Ross-McClain usually purchased land, developed lots on that land, and either built houses or sold the lots to other builders. In several instances, petitioner purchased land in his individual capacity and later sold that land for development to Ross-McClain or to third parties. Ross-McClain built over 580 custom homes during its existence. Due to a decline in its real estate business, on January 27, 1989, Ross-McClain filed a voluntary petition for bankruptcy under chapter 7 of the Bankruptcy Code with the United States Bankruptcy Court, Fort Worth, Texas, Division (case no. 489-40302). This petition was dismissed on June 20, 1989. On March 9, 1989, Ross-McClain filed another voluntary petition for bankruptcy under chapter 7 of the Bankruptcy Code with the United States Bankruptcy Court in Fort Worth (case no. 489-40883). The case was closed769 in 1989 and subsequently reopened on December 28, 1989. Case no. 489-40883 was still pending in the Bankruptcy Court when the instant case was tried. a. Wyndham Place Estates Phase IOn May 9, 1985, petitioner purchased three plots of land in Tarrant County, Texas, totaling 23.702 acres. These plots comprised what was commonly referred to as "Wyndham Place Estates Phase I" (Wyndham I). At the time petitioner acquired Wyndham I, the property was not zoned for development. However, on the day he purchased the property, petitioner filed a preliminary plat on Wyndham I with the City of Arlington Planning and Zoning Committee. The preliminary plat specified plans to divide the acreage into 73 lots. On May 16, 1985, petitioner filed a restrictive covenant on 14.242 acres of Wyndham I. The covenant restricted the lots' development to one single-family dwelling per lot. The document imposing this restriction erroneously stated that the subject property was owned by Ross-McClain instead of petitioner. The document was executed by petitioner on May 9, 1985, as president of Ross-McClain. In the process of platting Wyndham I, the Development Review Committee of the City of Arlington, 770 Texas, added a stipulation to petitioner's preliminary plat proposal. Petitioner appealed the stipulation to the Arlington City Council, and ultimately submitted a final plat for Wyndham I on August 15, 1985. The final plat for Wyndham I listed petitioner as owner and developer of the property. b. Wyndham Place Estates Phase IIOn July 15, 1985, petitioner acquired 15.1845 acres of land in Tarrant County, Texas, pursuant to a like-kind exchange. This land comprised what was commonly referred to as "Wyndham Place Estates Phase II" (Wyndham II). Wyndham II was contiguous with Wyndham I. At the time petitioner acquired Wyndham II, it was not zoned for development. On July 15, 1985, petitioner executed a deed of trust on Wyndham II. On July 25, 1985, petitioner filed a preliminary plat with the City of Arlington, proposing to subdivide Wyndham II into 52 lots. He submitted a final plat for Wyndham II on September 26, 1985. The final plat for Wyndham II listed petitioner as the owner and developer of the property. While petitioner was involved with Wyndham I and II, Ross-McClain was developing and building another subdivision in Arlington, called Parker Oaks. Petitioner771 had individually purchased the land that comprised Parker Oaks. c. Sale of Wyndham I and IIThe real estate market in the area surrounding Wyndham I and II was declining in the late 1980s. Nevertheless, on April 16, 1986, petitioner sold all of his interests in Wyndham I and II to Powers Construction Co., Inc. (Powers Construction), a real estate developer, for $ 1,626,380. On his 1986 joint Federal income tax return, petitioner reported a total basis of $ 1,430,341 in Wyndham I and II, and a total realized gain of $ 196,039 on the sale of the properties. He reported this gain as capital gain. At the time the properties were sold, no physical development had been done to the land. After petitioner transferred Wyndham I and II to Powers Construction, Ross- McClain purchased lots from Powers Construction and constructed houses on the lots in these developments. II. Petitioner's Cutting Horse ActivitiesPetitioner grew up on a farm in a rural community. He participated in rodeo in high school. He continued riding horses and was an avid rider during the years in issue. In the early 1980s, petitioner became interested in cutting horse 3 activities, and his corporation, 772 Ross-McClain, began purchasing horses. Petitioner read magazines and journals, and attended horse shows to educate himself in this area. He also discussed the ramifications of entering the business with his accountant, particularly future tax benefits. Petitioner did not, however, conduct an extensive study of the cutting horse business prior to entering into these activities, and he did not establish a regular training program conducted by qualified trainers. Neither did he develop a profit plan. Petitioner began purchasing horses of his own in 1982. He raised, competed, and sold his cutting horses. In addition, he trained and competed horses owned by Ross-McClain. He worked with the horses on a part-time basis. He kept and trained his horses on land that he owned located across the creek from his home and barn. Petitioner acquired horses on the following dates and in the following manner: (1) On March 5, 773 1982, petitioner acquired a brood mare named Mae Glo. This acquisition was made in conjunction with Ross-McClain. Petitioner bred Mae Glo and subsequently sold her. (2) On January 10, 1984, petitioner acquired a trained mare named Doc's Red Rattler, a competition cutting mare that petitioner did not breed. In early 1985, petitioner sold Doc's Red Rattler for approximately the same amount that he had paid for her. (3) On June 1, 1984, petitioner acquired a stallion named Doc A Dolly. He used Doc A Dolly as a competitive cutting horse. He attempted to use Doc A Dolly for stud services but was unsuccessful, and Doc A Dolly was gelded. The horse eventually died of an intestinal disease. (4) On December 8, 1984, petitioner purchased a mare named Nancy Bee Quixote. He rode Nancy Bee Quixote in competition. Between June 9, 1986, and September 10, 1986, Nancy Bee Quixote won $ 5,237 in prize money. Nancy Bee Quixote was sold pursuant to petitioner's bankruptcy proceedings. (5) On September 1, 1986, petitioner acquired a mare, The Sister Peppy, from Ross-McClain. The horse was born on petitioner's ranch. Although petitioner rode The Sister Peppy, she was not a good cutting horse774 and he later sold her. (6) On June 6, 1985, petitioner acquired King Quixote, a stallion, from Ross-McClain. It is unclear whether he paid Ross-McClain for this horse. Ross-McClain originally purchased King Quixote for $ 60,000 on March 1, 1985. Petitioner advertised King Quixote for stud service, and relied on this horse for his breeding operations. However, the horse was uninsured because of a cracked hoof, and later died of unknown causes. Petitioner did not have an autopsy performed on King Quixote. Petitioner produced copies of two advertisements that he placed involving his horses. He has not established that he placed either of these advertisements more than once. Petitioner instituted no consistent and concentrated program of advertising for his cutting horse activities. In 1988, due to the decline of his real estate business, petitioner was unable to continue financing his cutting horse activities. As a result, he discontinued these activities. Petitioner never showed a profit in any year from his cutting horse operations. Petitioner's financial recordkeeping practices with respect to his cutting horse activities were limited to retaining his checks and invoices775 until the end of the year, and sending these items to his accountant for preparation of his joint Federal income tax returns. Petitioner's accountant did not prepare monthly or quarterly financial statements with respect to the cutting horse activities. In sum, petitioner did not maintain books and records of his cutting horse activities in a businesslike manner. With respect to the reporting requirements of the governing association, the American Quarter Horse Association (AQHA), petitioner relied on individuals employed in Ross-McClain's business office to prepare the necessary reports. Although the rules of the AQHA require a seller of a horse to submit transfer papers, petitioner relied on the buyers of his horses to submit such papers. His failure to follow the rules of the AQHA resulted in his suspension from that organization. On Schedules F (Farm Income and Expenses) attached to his joint 1986 and 1987 Federal income tax returns, petitioner listed net Schedule F losses of $ 41,993 and $ 36,064 for 1986 and 1987, respectively. In the notice of deficiency, respondent determined that petitioner's cutting horse activities were "not engaged in for profit." Consequently, 776 respondent disallowed petitioner's cutting horse deductions reported on his 1986 and 1987 joint income tax returns to the extent these deductions exceeded petitioner's gross income from these activities. III. Ross-McClain's Cutting Horse ActivitiesRoss-McClain became involved in cutting horse activities in approximately 1980. There was no clear distinction between petitioner's cutting horse activities and those of Ross-McClain. For example, petitioner rode both his individually owned horses and those of the corporation. In addition, the property owned by Ross-McClain where it conducted its cutting horse activities was contiguous with petitioner's property where he conducted his cutting horse activities. Petitioner allowed his horses to roam onto the Ross-McClain property. As stated above, Ross-McClain purchased King Quixote for $ 60,000 on March 1, 1985, and transferred him to petitioner on June 6, 1985. Also, on September 1, 1986, Ross-McClain transferred The Sister Peppy to petitioner. The record is unclear whether petitioner made any payments to Ross-McClain with respect to these transfers. Ross-McClain never showed a profit from its cutting horse activities. 777 During the years in issue, both petitioner and Ross-McClain paid expenses relating to the cutting horse activities. Ross-McClain paid a portion of petitioner's personal expenses for his cutting horse activities. In the notice of deficiency, respondent characterized cutting horse expenditures made by Ross-McClain as constructive dividends to petitioner for 1986 and 1987. Ross-McClain's records with respect to its cutting horse activities were not maintained in a businesslike manner. Little effort was made to segregate the expenses of the corporation from those of petitioner. There is no evidence in the record to indicate that petitioner repaid Ross-McClain for the cutting horse and breeding expenses that it bore on his behalf. Some of the expenses deducted by Ross-McClain on its returns related to horses owned by petitioner. Respondent performed a reconciliation of Ross-McClain's fiscal years to determine the amount of petitioner's constructive dividends from Ross-McClain for the years in issue. Respondent determined that petitioner received constructive dividends of $ 36,024 and $ 42,097 for 1986 and 1987, respectively. Ross-McClain had sufficient earnings and profits to 778 support these constructive dividends determined by respondent. OPINION Issue 1. Whether Wyndham I and II Were Capital AssetsThe first issue for decision is whether petitioner held Wyndham I and II as capital assets. Petitioner argues that he correctly treated these properties as capital assets on his 1986 Federal income tax return. Respondent contends to the contrary. Section 1221(1) provides that property held by a taxpayer primarily for sale to customers in the ordinary course of a taxpayer's trade or business is not a capital asset. The function of section 1221(1) is "to differentiate between the 'profits and losses arising from the everyday operation of a business' * * and 'the realization of appreciation in value accrued over a substantial period of time'". Malat v. Riddell, 383 U.S. 569">383 U.S. 569, 572 (1966). "Primarily" means "principally" or "of first importance." Id. Petitioner bears the burden of proving that Wyndham I and II were capital assets. See Rule 142(a); Cottle v. Commissioner, 89 T.C. 467">89 T.C. 467, 485 (1987). The United States Court of Appeals for the Fifth Circuit has stated that section 1221(1)779 gives rise to three principal questions: (1) Was the taxpayer engaged in a trade or business, and if so, what business? (2) Was the taxpayer holding the property primarily for sale in that business? (3) Were the sales contemplated by the taxpayer "ordinary" in the course of that business? Suburban Realty Co. v. United States, 615 F.2d 171">615 F.2d 171, 178 (5th Cir. 1980). The first question is whether petitioner was engaged in the real estate business. "The question is whether the taxpayer has engaged in a sufficient quantum of focused activity to be considered to be engaged in a trade or business." Id. at 181. To be engaged in a trade or business, the taxpayer must be involved in the activity with continuity and regularity, and the taxpayer's primary purpose for engaging in the activity must be for income or profit. A sporadic activity, a hobby, or an amusement diversion does not qualify. Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 35 (1987); Paoli v. Commissioner, T.C. Memo 1991-351">T.C. Memo. 1991-351. However, in S & H, Inc. v. Commissioner, 78 T.C. 234">78 T.C. 234, 244 (1982),780 we stated that there is no -- "one-bite" rule, such that a taxpayer who engaged only in one venture or one sale cannot under any circumstances be held to be in a trade or business as to that venture or sale. * * * [Fn. ref. omitted.]Petitioner began working in the homebuilding industry in the early 1970s. This activity did not solely consist of acting on behalf of Ross-McClain. Petitioner testified that in several instances he also purchased undeveloped property in his individual capacity which he later sold for development to Ross-McClain or third parties. Parker Oaks was one such property. Wyndham I and II were others. In the cases of Wyndham I and II, 4 petitioner certainly engaged in a "sufficient quantum of focused activity", with a sufficient number and regularity of sales, to be considered in the real estate business. We note that in Reese v. Commissioner, 615 F.2d 226">615 F.2d 226, 230-231 (5th Cir. 1980), affg. T.C. Memo. 1976-275, the court stated that a single venture ordinarily is not a trade or business in the absence of an expectation of a taxpayer's continuing in the same field of endeavor. Here, it is 781 clear that petitioner engaged in multiple real estate ventures. Petitioner acquired Wyndham I and II in just over 2 months for a total purchase price of $ 1,430,341. With respect to the land comprising Wyndham I, he was able to close three separate transactions (three tracts of land) in one day. Petitioner filed plats with the City of Arlington Planning and Zoning Committee to subdivide the land comprising Wyndham I and II, and appealed a stipulation proposed by the Arlington Development Review Committee. The final plats for Wyndham I and II listed petitioner as the owner and developer of the properties. His efforts in obtaining subdivision approval illustrate that he was not a passive investor. 782 He also filed a restrictive covenant regarding Wyndham I, restricting the lots' development to one single-family dwelling per lot. (The document imposing this restriction erroneously stated that the subject property was owned by Ross-McClain.) These activities were conducted in a businesslike manner. Accordingly, based on the record before us, we hold that petitioner was in the real estate business and that he held Wyndham I and II as part of that business. Thus, we must decide whether petitioner's primary purpose was to hold the properties for sale to customers in the ordinary course of his trade or business or whether his primary purpose was to hold the properties for some other business reason. Whether property is held primarily for sale to customers in the ordinary course of a taxpayer's trade or business is a question of fact. Guardian Industries Corp. v. Commissioner, 97 T.C. 308">97 T.C. 308, 315-316 (1991); Cottle v. Commissioner, supra at 486; S & H, Inc. v. Commissioner, supra at 242. Several factors are considered in deciding this issue, but no one factor is controlling. Biedenharn Realty Co. v. United States, 526 F.2d 409">526 F.2d 409, 415 (5th Cir. 1976).783 It is generally the taxpayer's purpose in holding the property at the time of sale that must be determined, although we may consider events occurring prior to such time in order to identify such purpose. Guardian Industries Corp. v. Commissioner, supra at 316; Cottle v. Commissioner, supra at 487. The following factors are considered in determining whether a particular property is held for sale to customers in the ordinary course of a taxpayer's trade or business: (1) The nature and purpose of the acquisition and the duration of the ownership; (2) the extent and nature of the taxpayer's efforts to sell the property; (3) the number, extent, continuity, and substantiality of the sales; (4) the extent of subdividing, developing, and advertising to increase sales; (5) the use of a business office for the sale of the property; (6) the character and degree of the supervision or control exercised by the taxpayer over any representative selling the property; and (7) the time and effort the taxpayer habitually devoted to the sales. See Byram v. United States, 705 F.2d 1418">705 F.2d 1418, 1424 (5th Cir. 1983);784 United States v. Winthrop, 417 F.2d 905">417 F.2d 905, 910 (5th Cir. 1969); Guardian Industries Corp. v. Commissioner, supra at 316-317; Cottle v. Commissioner, supra at 487-488. We note that these factors have no independent significance but merely aid the finder of fact in determining, on the basis of the entire record, the taxpayer's purpose in holding the property. See Byram v. United States, supra at 1424. Petitioner argues that he intended to and indeed held Wyndham I and II for investment purposes. Respondent, on the other hand, contends that petitioner intended to prepare the land for development, and then sell it to his corporation or third parties. We agree with respondent and hold that petitioner held Wyndham I and II for sale to customers in the ordinary course of his real estate business. As a result, the proceeds from the sale of the properties must be characterized as ordinary income. Our conclusion is supported by the considerations discussed below. At issue in a dealer-versus-investor case is a taxpayer's motivation in holding a particular785 piece of property. See, e.g., Jersey Land & Development Corp. v. United States, 539 F.2d 311">539 F.2d 311 (3d Cir. 1976). Petitioner testified that he intended to develop both Wyndham I and II. In fact, immediately following his purchase of the properties, he began the process of obtaining the necessary approvals for the zoning and subdividing of the properties. As part of the platting process, petitioner appealed a stipulation to the City Council. It is evident that he spent a substantial amount of time developing his properties. Petitioner held the properties for under 1 year. This relatively short period of time also supports our conclusion that petitioner held the property for sale to customers in the ordinary course of his trade or business. See, e.g., Nash v. Commissioner, 60 T.C. 503 (1973). During the time he owned the properties, he held himself out as owner and developer of the properties. Further, the sale of Wyndham I and II was "ordinary" in the course of petitioner's business. We note that a sale of a large tract in a single transaction does not necessarily mean that the property was not held for sale in the786 ordinary course of a taxpayer's trade or business. See Major Realty Corp. v. Commissioner, 749 F.2d 1483">749 F.2d 1483, 1489 (11th Cir. 1985), affg. in part and revg. on another issue T.C. Memo 1981-361">T.C. Memo. 1981-361; Williams v. United States, 329 F.2d 430 (5th Cir. 1964); Lawrie v. Commissioner, 36 T.C. 1117">36 T.C. 1117, 1121 (1961). Petitioner had a history of purchasing raw land which he later sold for development, such as Parker Oaks. The transactions involved here were not "an isolated holding dissimilar from any other transaction and unrelated to the history of petitioners' activities." Goodman v. Commissioner, 40 B.T.A. 22">40 B.T.A. 22, 24 (1939). In sum, based on the entire record before us, as well as petitioner's failure to meet his burden of proof, we hold that petitioner held Wyndham I and II primarily for sale to customers in his real estate trade or business within the meaning of section 1221. We therefore sustain respondent's determination on this issue. Issue 2. Whether Petitioner Engaged in Cutting Horse Activities With a Profit ObjectiveThe second issue787 is whether petitioner's cutting horse activities were "engaged in for profit" within the meaning of section 183. Petitioner contends that he had an actual and honest objective of making a profit. Respondent argues to the contrary. Section 183(a) provides that "if * * [an] activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section." Thus, a taxpayer must engage in an activity with an actual and honest objective of making a profit. See Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 645-646 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983). If a taxpayer engages in an activity without a profit objective, deductions attributable to the activity are allowed only to the extent of the income derived from the activity. Sec. 183; Hager v. Commissioner, 76 T.C. 759">76 T.C. 759, 781 (1981). The determination of whether an activity is engaged in for profit is to be made by reference to objective standards, taking into account all the facts and circumstances of each case. Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 506 (1982),788 affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984); Jasionowski v. Commissioner, 66 T.C. 312">66 T.C. 312, 319 (1976); sec. 1.183-2(b), Income Tax Regs. Greater weight is given to the objective facts than to the taxpayer's own statements of intent. Sec. 1.183-2(a), Income Tax Regs. The burden of proof is on the taxpayer to show that he or she engaged in an activity with the objective of realizing an economic profit. Rule 142(a). Section 1.183-2(b), Income Tax Regs., sets forth a nonexclusive list of factors used in determining whether an activity is engaged in for profit. The regulation lists nine factors: (1) The manner in which the taxpayer carried on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that the assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on other similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) 789 elements indicating personal pleasure or recreation. No single factor, nor the existence of even a majority of the factors, is controlling. Golanty v. Commissioner, 72 T.C. 411">72 T.C. 411, 425-426 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981); see also Abramson v. Commissioner, 86 T.C. 360">86 T.C. 360, 371 (1986). In applying these factors, the "courts have universally sought to ascertain the taxpayer's true intent." Dreicer v. Commissioner, supra at 645. The following discussion applies the nine factors to petitioner's cutting horse activities: Factor (1): Manner in Which the Taxpayer Carried On the ActivityPetitioner did not carry on his cutting horse activities in a businesslike manner. See sec. 1.183-2(b)(1), Income Tax Regs. He did not prepare a profit plan before entering into these activities, and did not undertake any consistent program of advertising his horses. Petitioner also did not maintain complete and accurate books and records on these activities. At trial he testified that he kept records of these activities, but that virtually790 all of his records had been kept in storage and were destroyed by the storage facility management because he was unable to pay their fees (due to his bankruptcy). However, petitioner has not presented any corroborating evidence to substantiate this claim, and of course we are not bound to accept his self-serving testimony. See Geiger v. Commissioner, 440 F.2d 688">440 F.2d 688, 689 (9th Cir. 1971), affg. per curiam T.C. Memo. 1969-159. Factor (2): The Expertise of the Taxpayer or His AdvisorPetitioner has had an interest in horses for many years, and is an avid rider. However, his background and interest in horses are not necessarily synonymous with expertise in the cutting horse business. Petitioner did not make an extensive study of the profit potential of training or breeding cutting horses. While a formal market study is not required, his failure to make basic investigation of the factors that would affect profit is indicative of a lack of profit objective. Underwood v. Commissioner, T.C. Memo. 1989-625; Burger v. Commissioner, T.C. Memo. 1985-523, affd. 809 F.2d 355">809 F.2d 355 (7th Cir. 1987).791 Petitioner did not have the assistance of a competent staff. For example, he did not institute a regular training or breeding program conducted by qualified individuals. See sec. 1.183-2(b)(3), Income Tax Regs. In short, he has not established that his cutting horse activities were performed by persons with expertise in the cutting horse business. Factor (3): The Time and Effort Expended by the Taxpayer in Carrying On the ActivityDuring the years in issue, petitioner was engaged in the real estate business, both in his individual capacity and on behalf of Ross-McClain, and he pursued his cutting horse activities during his free time. While a taxpayer may devote a limited amount of time to an activity and still have a profit objective, for example, where the taxpayer employs competent and qualified persons to carry on the activity, sec. 1.183-2(b)(3), Income Tax Regs., petitioner has not established such facts in this case. He has not shown that he hired any skilled employees to assist him. He has not shown that he personally spent considerable time and effort on the cutting horse activities. Factor (4): The Expectation That Assets Used in the Activity May Appreciate792 in ValuePetitioner has not presented any evidence that he had a realistic expectation that his cutting horses would increase in value. In fact, he testified that the value of his horses dropped during the period he owned the horses. It is clear that petitioner purchased some of his horses at or near their prime (for competition reasons), therefore decreasing the likelihood that their value would increase during his ownership. For example, he testified that he purchased Doc's Red Rattler as a "finished and trained" cutting mare, and that he sold her only a year or so later for the same amount he paid for her. Petitioner argues that he expected to make money from the sale of his horses' offspring. This assertion is not supported by the record. He has documented the sale of only one offspring, The Sister Peppy. However, he has not documented that his income from the breeding and sale of The Sister Peppy exceeded the attendant expenses. Neither has he documented any additional offspring (or the expectation of any additional offspring) from his horses. Finally, petitioner has not shown that he made any income from stud services, or that he expected to profit from this activity. 793 Petitioner did not establish that he made a serious effort to promote stud services, other than the one occasion when he advertised King Quixote. 5Factor (5): The Success of the Taxpayer in Carrying On Similar or Dissimilar ActivitiesPetitioner's cutting horse activities generated losses. Ross-McClain's cutting horse activities also generated losses. Petitioner entered into his real estate activities to make a profit, and he was successful. However, he did not apply the knowledge he acquired from operating a successful real estate business to his cutting horse activities. Factors (6) and (7): The Taxpayer's History of Income or Losses With Respect to the Activity794 and The Amount of Occasional Profits, If Any, Which Were EarnedPetitioner had a history of losses from his cutting horse activities. He did not prepare a profit plan for these activities and, in fact, never showed a net profit from them. The occasional funds he received from these activities were de minimis compared to the expenses he incurred. Petitioner contends that, had he continued his cutting horse activities, they would have become profitable. He states that the economic downturn that ultimately led to his declaring bankruptcy interrupted this development of his cutting horse activities. See sec. 1.183-2(b)(6), Income Tax Regs. However, we are not convinced that petitioner was on such a track. He presented no evidence to substantiate that his continued losses were associated with customary business risks or reverses. Accordingly, we cannot agree with petitioner's contention that the economic downturn was responsible for the fact that he never showed a net profit from his cutting horse activities. Factor (8): The Financial Status of the TaxpayerPetitioner had substantial income from his real estate operations during the years in issue. Based on the record, 795 it appears that he was financially capable of supporting his cutting horse losses. However, following the collapse of his real estate business, petitioner sold the majority of his cutting horse assets because he was no longer able to finance them. Factor (9): Elements of Personal Pleasure or RecreationBased upon the facts before us, we conclude that petitioner engaged in his cutting horse activities primarily for recreation and personal pleasure. He grew up on a farm in a rural community, and he was an avid rider of horses. "The presence of personal motives in carrying on of an activity may indicate that the activity is not engaged in for profit". See sec. 1.183-2(b)(9), Income Tax Regs. See also Commissioner v. Groetzinger, 480 U.S. 23">480 U.S. 23, 35 (1987), where the Court stated that a hobby or amusement diversion does not qualify as constituting a profit objective. After evaluating the facts in this case, we hold that petitioner's cutting horse activities were not organized and/or operated with an actual and honest objective of making a profit. Accordingly, we sustain respondent's determination on this issue. Issue 3. Constructive Dividends796 The third issue is whether expenses incurred by Ross-McClain constituted constructive dividends to petitioner. Petitioner admits that he received constructive dividends from Ross-McClain, but not to the extent determined by respondent. Respondent contends that the constructive dividends determined in the notice of deficiency should be upheld. Taxable income includes dividends received by shareholders from corporations. Secs. 301(c)(1), 61(a)(7). In determining whether there has been a constructive dividend, "the crucial concept * * is that the corporation conferred an economic benefit on the stockholder without expectation of repayment." United States v. Smith, 418 F.2d 589">418 F.2d 589, 593 (5th Cir. 1969). As a result, in a case such as this where petitioner and Ross-McClain were both engaged in the same activity, we must determine whether the corporate expenditures at issue were made primarily to benefit Ross-McClain or primarily for the personal benefit of petitioner. See Loftin & Woodard, Inc. v. United States, 577 F.2d 1206">577 F.2d 1206, 1215-1217 (5th Cir. 1978). This issue presents a question of fact. See Lengsfield v. Commissioner, 241 F.2d 508">241 F.2d 508, 510 (5th Cir. 1957),797 affg. T.C. Memo. 1955-257. Petitioner has the burden of proof. Rule 142(a). Initially, petitioner entered into his cutting horse activities through his wholly owned corporation, Ross-McClain. Even after he began cutting horse activities in his individual capacity, petitioner's and Ross-McClain's operations were intertwined. Both petitioner and Ross-McClain made payments for expenses relating to the cutting horses. Petitioner trained and competed horses owned both by himself and Ross-McClain. We think Ross-McClain's cutting horse activities were engaged in primarily for the recreation and personal pleasure of petitioner. Thus, for all practical purposes, there was no distinction between the cutting horse activities of petitioner and Ross-McClain. Consequently, we view the expenditures of Ross-McClain on its cutting horse activities as being the personal expenses of petitioner, and therefore we regard them as corporate distributions. See, e.g., Greenspon v. Commissioner, 23 T.C. 138 (1954), affd. and revd. in part on another issue 229 F.2d 947">229 F.2d 947 (8th Cir. 1956). In his opening brief, petitioner's798 counsel stated that "there was some commingling of expenses between petitioner's cutting horse operation, and that of Ross-McClain * * * it is likewise admitted that, to the extent Ross-McClain paid expenses that should have been petitioners', the payment in theory represents a constructive dividend from Ross-McClain to petitioner." What remains for decision is the amount of these constructive dividends. The cutting horse activities of Ross-McClain were not consistently accounted for separately from those of petitioner. As opposed to the books and records of Ross-McClain's home construction business which were organized, accurate, and complete, those regarding the corporation's cutting horse activities were incomplete and disorganized. Due to the lack of records available to respondent, the amounts of expenditures actually paid by Ross-McClain were estimated. Petitioner has shown neither that respondent's determination was erroneous nor that Ross-McClain did not have sufficient earnings and profits. In fact, the corporate Federal income tax returns during the years in issue indicate that there were sufficient earnings and profits. Petitioner received an economic benefit with799 respect to Ross-McClain's payment of his expenses for horse-related activities. These expenses were neither ordinary nor necessary business expenses, but rather reimbursement of petitioner's personal expenses. Accordingly, we sustain respondent's determination that the corporate payments constituted constructive dividends to petitioner, and are thus includable in his gross income for 1986 and 1987. Issue 4. Section 6653(a)(1)(A) and (B) Additions to TaxThe fourth issue is whether petitioner is liable for the additions to tax for negligence or intentional disregard of rules or regulations pursuant to section 6653(a)(1)(A) and (B) for 1986 and 1987. Petitioner contends that he is not liable for these additions. Respondent argues to the contrary. Section 6653(a)(1)(A) imposes an addition to tax if any part of an underpayment of tax is due to negligence or intentional disregard of rules or regulations. Section 6653(a)(1)(B) imposes an additional amount, but only with respect to the portion of the underpayment attributable to the negligence. Negligence is the lack of due care or failure to do what a reasonable and ordinarily prudent person would do under the circumstances. 800 Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947 (1985). Respondent's determination of negligence is presumed to be correct and petitioner has the burden of proving that it is erroneous. Rule 142(a); Luman v. Commissioner, 79 T.C. 846">79 T.C. 846, 860-861 (1982). On this record we hold that petitioner was negligent in 1986 and 1987. First, his purchase and sale of Wyndham I and II was part of his real estate business operations. He was knowledgeable in the area, and negligent in misclassifying the properties as capital assets. Second, petitioner engaged in his cutting horse activities primarily for recreational purposes. His deduction of excessive expenses for these activities shows a "lack of due care". Petitioner was also negligent in not reporting his constructive dividends. These amounts clearly conferred an economic benefit upon him. Hence petitioner negligently, or with an intentional disregard of the rules or regulations, misreported his income and expenses with regard to the issues decided herein. Petitioner argues that he relied on his accountant to report his income and expenses. A taxpayer may be insulated from liability801 for a negligence addition by good faith reliance on professional advice. Jackson v. Commissioner, 86 T.C. 492">86 T.C. 492, 539-540 (1986), affd. 864 F.2d 1521">864 F.2d 1521 (10th Cir. 1989). To be insulated, however, a taxpayer must have provided the agent with correct information, and the error must be due to the agent's mistake. Pessin v. Commissioner, 59 T.C. 473">59 T.C. 473, 489 (1972). Here petitioner has not established that his errors were due to his agent's mistake. To the contrary, he is a well-educated individual, with a background in both real estate and horses. He either knew or should have known that his return positions were erroneous and negligent. It also appears that petitioner did not fully disclose all of the relevant facts to his accountant to enable him to accurately prepare petitioner's joint returns. Thus, under the circumstances of this case, we do not believe that petitioner should be insulated from liability for the negligence additions because of his claimed reliance on his accountant's advice. We conclude that petitioner has failed to show that any part of the determined deficiencies was not due802 to negligence or intentional disregard of the rules. We therefore sustain respondent's determinations with respect to the section 6653(a)(1)(A) and (B) additions to tax. Issue 5. Section 6661 Additions to TaxThe final issue is whether petitioner is liable for the addition to tax for substantial understatement of tax pursuant to section 6661 for 1986 and 1987. Petitioner contests this addition to tax. Respondent argues that the determined addition should be upheld. Section 6661(a) provides for an addition to tax if there is a substantial understatement of income tax. The amount of the section 6661 addition to tax for additions assessed after October 21, 1986, is equal to 25 percent of the amount of any underpayment attributable to a substantial understatement. Omnibus Budget Reconciliation Act of 1986, Pub. L. 99-509, sec. 8002, 100 Stat. 1951; Pallottini v. Commissioner, 90 T.C. 498">90 T.C. 498, 501-502 (1988). An understatement is substantial if it exceeds the greater of 10 percent of the tax required to be shown on the return or $ 5,000. Sec. 6661(b)(1)(A). The understatement is reduced if it is based on substantial authority or is adequately*803 disclosed on the return or in a statement attached to the return. Sec. 6661(b)(2)(B). It is clear that petitioner's 1986 and 1987 understatements exceeded the minimal amount required for section 6661 to apply. Further, these understatements were neither based on substantial authority nor adequately disclosed on his joint Federal income tax returns or in a statement attached to the returns. We therefore sustain respondent's section 6661 determinations. To reflect concessions and our conclusions on the disputed issues, Decision will be entered under Rule 155. Footnotes1. The joint notice of deficiency, dated June 8, 1990, is addressed to Kenneth R. and Christy M. Dunwoody. Mr. and Mrs. Dunwoody began divorce proceedings in 1989, and their divorce became final a few months prior to the trial of this case. Only Kenneth R. Dunwoody petitioned this Court for a redetermination of the deficiencies and additions to tax. "Where the deficiency or liability is determined against more than one person in the notice by the Commissioner, only such of those persons who shall duly act to bring a case shall be deemed a party or parties." Rule 60(a)(1); see also Rule 34(a). Thus, Kenneth R. Dunwoody is the only petitioner in this case. Unless indicated otherwise, all Rule references are to the Tax Court Rules of Practice and Procedure. All section references are to the Internal Revenue Code in effect for the years in issue.↩2. The parties filed a Stipulation of Settled Issues at trial. These settled issues will be given effect in the Rule 155 computations.↩3. A cutting horse is a quick, light saddle horse trained for use in separating cattle from a herd.↩4. While the record is incomplete with regard to petitioner's activities concerning his other property purchases, we emphasize that petitioner bears the burden of proof on this issue under Rule 142(a)↩. He has provided no evidence to prove that he held these other properties as an investor or in any other nonbusiness capacity.5. While petitioner did produce copies of two other advertisements that he placed involving his horses, as stated, he did not establish that he placed either of these advertisements more than once. In sum, we are unpersuaded that petitioner instituted a consistent and concentrated program of advertising for his cutting horse activities.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620896/	THOMAS E. ABBOTTS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAbbotts v. CommissionerDocket No. 27154-83.United States Tax CourtT.C. Memo 1985-460; 1985 Tax Ct. Memo LEXIS 173; 50 T.C.M. (CCH) 953; T.C.M. (RIA) 85460; September 3, 1985. Vincent L. Alsfeld, for the petitioner. Christine Colley, for the respondent. RAUMMEMORANDUM OPINION RAUM, Judge: The Commissioner determined a $12,782.09 deficiency in petitioner's income tax and a $648.50 addition to tax under section 6653(a), I.R.C. 1954, for the year 1979. After concessions, the principal issue for decision is whether $3,421.44 in "[w]ages designated as sick leave" were excludable from petitioner's gross income under section 104(a)(1), I.R.C. 1954. The case was submitted174 fully stipulated. Petitioner was a resident of Wilton, New Hampshire, at the time he filed the petition in this case. Petitioner was employed by the Federal Aviation Administration (FAA) as an air traffic controller until early December 1976, when it was decided that he no longer met the medical requirements of the position. On December 10, 1976, he was thus "temporarily disqualified for ATC [Air Traffic Control] duties". A further medical determination, dated April 4, 1977, found that petitioner "does not meet the retention standards as spelled out" in a certain handbook described as "Neurotic and Personality Disorder". That determination concluded with a statement that petitioner "has a long history of emotional problems requiring medication repeadly [sic] that would interfer [sic] from his safely and efficiently performing the function of his duties". On May 19, 1977, petitioner was permanently disqualified from active air traffic control duties. Such permanent disqualification was set forth in a "Final Notice of Determination to Remove from Active Control Duties", dated May 19, 1977. The notice informed petitioner that since he had requested "second career training"175 he would be reassigned to a second career training pool. 1 The notice also informed him that since his removal was based on medical reasons, he might be entitled to disability retirement following training, and advised him to complete certain forms for that purpose, to be transmitted within 10 days to the "Personnel Management Division", which in turn would forward them to the Civil Service Commission for approval. The foregoing notice further stated that final action on the approved application would be "held in abeyance pending completion of your retraining and the utilization of accumulated sick leave". The notice finally stated: At least 60 days prior to your completion of training, a determination will be made to reassign you to a position other than as a career controller, transfer176 or separate you. If separation is necessary your disability retirement application if approved by the Civil Service Commission will be acted upon after your accumulated sick leave has been exhausted. Petitioner completed and transmitted the required forms as set forth in the notice. He had in fact elected to enter the retraining program, and was transferred to it on May 22, 1977. While in the "Second Career Program", petitioner retained the last civil service grade and rate of pay assigned to him as a controller. He had also applied for disability retirement, but, as indicated in the notice of May 19, 1977, final action on that application was "held in abeyance pending the completion of your retraining and the utilization of accumulated sick leave". After approximately two years in the retraining program, no other available position was found for petitioner commensurate with his grade and position. Accordingly, on May 22, 1979, he was put on leave with pay status pending his retirement on July 2, 1979, for disability. He did not immediately retire upon completion of the retraining program because, as already noted, he was required to exhaust all accumulated sick leave prior177 to receiving any disability retirement payments. Petitioner received $23,348.16 from the FAA in 1979, consisting of $14,319.36 in "Re-Training" wages, a $5,607.36 lump sum annual leave payment and $3,421.44 in "[w]ages designated as sick leave". 2 Petitioner now concedes that the "Re-Training" wages and the annual leave payment are includable in his gross income, but argues that the $3,421.44 sick leave payment is excluded from gross income by section 104(a)(1), I.R.C. 1954. Section 104(a)(1) provides that "gross income does not include * * * amounts received under workmen's compensation acts as compensation for personal injuries or sickness". The Income Tax Regulations have given an expansive interpretation to these provisions in favor of employees by excluding from gross income also payments received "under a statute in the nature of a workmen's compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment" (emphasis178 supplied). Section 1.104-1(b), Income Tax Regs. A statute is "in the nature of a workmen's compensation act" if it allows disability payments only in respect of on-the-job injuries or sickness. "A statute will not be considered akin to a workers' compensation act if it allows for disability payments for any reason other than on-the-job injuries". Haar v. Commissioner,78 T.C. 864">78 T.C. 864, 868 (1982), affd. 709 F.2d 1206">709 F.2d 1206 (8th Cir. 1983). There is no question, nor has petitioner argued, that the statute under which he received "[w]ages designated as sick leave" was a "workmen's compensation act". It clearly was not. The question is, therefore, was it a "statute in the nature of a workmen's compensation act". We conclude that it was not. The provisions under which petitioner received "[w]ages designated as sick leave", set forth in the margin 3, allow employees sick leave when suffering from any injury or sickness, whether job related or not. In fact, they even allow sick leave when an employee is "required to give care and attendance to a member of his immediate family who is afflicted with a contagious disease". The specific subsection providing179 benefits in petitioner's case does not limit its benefits to "compensation to employees for personal injuries or sickness incurred in the course of employment" (section 1.104-1(b)), but more broadly allows "sick leave to an employee when the employee * * * [i]s incapacitated for the performance of duties by sickness, injury, or pregnancy and confinement" (5 C.F.R. section 630.401(b) (1979)). Consequently, because the relevant provisions were not limited to compensation in respect of on-the-job injuries or sickness, petitioner can hardly be viewed as receiving benefits under a "statute in the nature of workmen's compensation". Haar v. Commissioner,supra,78 T.C. at 867-868. 180 Petitioner argues that the ultimate cause of his receiving a continuation of payment of his salary as sick leave was "a job related stress injury", and that such payment was therefore excludable under section 104(a)(1) and the regulations. That contention misses the point. To be excludable, the payment must be made under a workmen's compensation act, or under a statute akin thereto, for job related injuries or sickness. The amount received by petitioner for his accumulated sick leave was in no sense paid to him under any such statute, and it is therefore immaterial whether such payment was occasioned by a job related injury or sickness. Rutter v. Commissioner,760 F.2d 466">760 F.2d 466 (2d Cir. 1985), affg. T.C. Memo. 1984-525. Section 104(a)(1) and its liberal interpretation by the regulations are not applicable here. 4181 Moreover, on this record, it is even questionable whether petitioner's medical condition was caused by his job as an air traffic controller. While we think it not unlikely that stress on the job may have affected his medical condition, the record shows that he had a "long history of emotional problems", which, as far as the record discloses, could well have antedated his work as an air traffic controller. The burden was upon him, and he has not established otherwise. Nor has he shown that stress on the job was responsible for exacerbating a nondisabling pre-existing condition to the point that as a consequence he became medically unfit to perform services of an air traffic controller. Cf. Take v. Commissioner,82 T.C. 630">82 T.C. 630 (1984); Take v. Commissioner,T.C. Memo. 1985-388, 50 T.C.M. (CCH) 600">50 T.C.M. 600, 54 P-H Memo T.C. par. 85,388 (1985). Finally, in respect of the section 6653(a) addition to tax for negligence, petitioner has in no way shown that the underpayment of tax remaining after the Commissioner's concessions, including that part connected to petitioner's erroneous exclusion from income of his "[w]ages designated as sick leave", was not "due to negligence*182 or intentional disregard of rules and regulations". Section 6653(a). See Bixby v. Commissioner,58 T.C. 757">58 T.C. 757, 791-792 (1972). Accordingly, the section 6653(a) addition to tax for negligence is sustained. To reflect concessions, Decision will be entered under Rule 155.Footnotes1. The "Second Career Program" was provided pursuant to the Air Traffic Controllers Act, 5 U.S.C. sec. 3381, Pub. L. 92-297, 86 Stat. 141, 142. That program is described in Gallagher v. Commissioner,75 T.C. 313">75 T.C. 313, 315 (1980).See also Watson v. Commissioner,T.C. Memo. 1981-465, 42 T.C.M. 877↩, 878, 50 P-H Memo T.C. par. 81,465 (1981).2. He also received $9,120 in pension and annuity income during 1979 from the Civil Service Retirement and Disability Fund for the period in 1979 after his retirement became effective.↩3. Section 6307(a) of Title V of the United States Code provides that an employee (as defined in 5 U.S.C. 6301) "is entitled to sick leave with pay". The regulations thereunder outline the instances when sick leave may be granted, as follows [5 C.F.R. section 630.401 (1979)]: Sec. 630.401 Grant of sick leave. An agency shall grant sick leave to an employee when the employee: (a) Receives medical, dental, or optical examination or treatment; (b) Is incapacitated for the performance of duties by sickness, injury, or pregnancy and confinement; (c) Is required to give care and attendance to a member of his immediate family who is afflicted with a contagious disease; or (d) Would jeopardize the health of others by his presence at his post of duty because of exposure to a contagious disease.↩4. The Commissioner has suggested that petitioner might have argued that section 105(d), I.R.C. as in effect during 1979, allows the desired exclusion. However, he was correct in concluding that it does not, because petitioner was not "permanently and totally disabled". Haar v. Commissioner,78 T.C. 864">78 T.C. 864, 868 (1982), affd. 709 F.2d 1206">709 F.2d 1206 (8th Cir. 1983). Furthermore, the section 105(d)↩ exclusion was subject to a limitation of $100 a week, which would have resulted in a substantially smaller exclusion than the one sought by petitioner here.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620897/	Robert Boehm and Frances Boehm, Petitioners v. Commissioner of Internal Revenue, RespondentBoehm v. CommissionerDocket No. 52348United States Tax Court28 T.C. 407; 1957 U.S. Tax Ct. LEXIS 186; May 22, 1957, Filed 186 Decision will be entered for the respondent. Petitioner owned securities. Also, she owned all of the stock of three corporations. In April and May 1948, petitioner made sales for cash of the securities to her mother-in-law and to her father-in-law in separate transactions with each. Within a few weeks thereafter, the mother-in-law sold for cash the securities she had acquired to one of petitioner's wholly owned corporations for the same price which she had paid to petitioner. With respect to the securities petitioner sold to her father-in-law, they passed to her sister-in-law who, in turn, on the same day as petitioner had transferred the securities to her father-in-law, sold part to one of petitioner's wholly owned corporations, and the rest to another one of petitioner's wholly owned corporations receiving from the two corporations a total amount equal to that which petitioner had received from her father-in-law. Held, that all of the transactions represented arrangements whereby petitioner made sales of her securities, indirectly, to each of her three wholly owned corporations, and, therefore, no deductions are allowable in respect of losses from such sales because187 of the prohibition contained in section 24 (b) (1) (B), 1939 Code. Held, further, that the provisions of section 24 (b) (1) (A) and (b) (2) (D) cannot be availed of by petitioner under the facts and circumstances, so as to obtain deductions in respect of losses from the sales to her mother-in-law and to her father-in-law. Rubin H. Marcus, Esq., for the petitioners.Theodore E. Davis, Esq., for the respondent. Harron, Judge. HARRON 408 The Commissioner determined a deficiency in income tax for the taxable year 1948 in the amount of $ 1,715,88. The only issue is whether under the provisions of section 24 (b) (1) (B), 1939 Code, no deduction shall be allowed the petitioner in respect of losses from sales of securities in the taxable year.OPINION.All of the facts have been stipulated. 188 The stipulation is adopted as our findings of fact. The facts are as follows.Robert Boehm and his wife, Frances, who is referred to hereinafter as the petitioner, filed a joint return for the taxable year 1948 with the collector of internal revenue for the second district of New York.Petitioner's mother-in-law is Lillian Boehm; her father-in-law is Louis Boehm; and her sister-in-law is Lucille White. In 1948, as is set forth hereinafter, petitioner engaged in cash transactions with each of the above three individuals. Also involved under the issue to be decided are three corporations which were wholly owned by petitioner in 1948, namely, Orange Realty Corporation, New Brunswick Realty Corporation, and 414-418 George Street Corporation.Petitioner owned 500 shares of stock of West Penn Electric Co., which she bought on October 2, 1947, for $ 8,853.20; and 610 shares of stock of New York Water Service Co., which she bought on December 9, 1947, and February 6, 1948, at a total cost of $ 34,277.69. Petitioner disposed of all of these shares of stock in 1948 in the following way:On April 16, 1948, petitioner transferred 500 shares of stock of West Penn Electric Co. to Lillian Boehm189 who paid petitioner, by check, $ 7,687.50, the then market price.On May 20, 1948, petitioner transferred 610 shares of stock of New York Water Service Co. to Louis Boehm who paid petitioner, by check, $ 24,171.25, the then market price.With respect to the checks used in these transactions, it is agreed that the checks of Lillian Boehm and Louis Boehm were drawn on their respective individual bank accounts and that petitioner deposited those checks in her individual bank account.All of the shares of stock of the two corporations above named found their way soon afterward into the hands of petitioner's wholly owned corporations in the following way:On May 14, 1948, Lillian Boehm sold the 500 shares of stock of West Penn Electric Co. to Orange Realty Corporation for the same 409 price which she had paid to petitioner, $ 7,687.50, for which Orange Realty gave Lillian Boehm its check which she deposited in her bank account. On May 14, 1948, the market value of the West Penn Electric Co. stock was $ 9,147.50.On May 20, 1948, the same day on which petitioner transferred the 610 shares of stock of New York Water Service Co. to her father-in-law, Louis Boehm, Lucille White, her190 sister-in-law, sold 300 shares of stock of New York Water Service Co. to New Brunswick Realty, and 310 shares of the same stock to 414-418 George Street Corporation for $ 11,887.50, and $ 12,283.75, respectively, or a total sum of $ 24,171.25, for which each corporation gave its check to Lucille White, and she deposited the checks in her bank account. That is to say, Lucille White received the same amount as Louis Boehm paid petitioner for the 610 shares of stock of New York Water Service Co.The petitioner, in the joint return for 1948, reported the sale of the 500 shares of West Penn Electric Co. stock as a sale resulting in a short-term capital loss of $ 1,205.70; and she reported the sale of 610 shares of stock of New York Water Service Co. as a sale resulting in a short-term capital loss of $ 10,106.44. The Commissioner disallowed both deductions. In the statement attached to the statutory deficiency notice, he did not state his reasons for disallowing the deductions.The question is whether no loss deductions are allowable to the petitioner, Frances Boehm, with respect to her transfers of two blocks of stocks because of the provisions of section 24 (b) of the 1939 Code. 191 1The respondent contends that Frances Boehm indirectly made sales of the stocks to her wholly owned corporations, Orange Realty, New Brunswick192 Realty, and 414-418 George Street Corporation, by means of transfers of the stocks to her mother-in-law and her father-in-law, and, therefore, deductions of losses by her are prohibited by the provisions of section 24 (b) (1) (B).Petitioner contends that she made sales of the stocks to persons who are not within the class defined by section 24 (b) (2) (D), namely, her mother-in-law and her father-in-law, so that her deductions of 410 losses are not barred by the provisions of section 24 (b) (1) (A). It is petitioner's position that her transactions with her mother-in-law and father-in-law were completed transactions for which she received fair consideration, and that, therefore, they are not reached by the statutory provision upon which the respondent relies, namely, section 24 (b) (1) (B).We cannot agree with petitioner's contentions. "Section 24 (b) states an absolute prohibition -- not a presumption -- against the allowance of losses on any sales between the members of certain designated groups." McWilliams v. Commissioner, 331 U.S. 694">331 U.S. 694. The legislative intention in enacting the provisions of section 24 (b) was to close the loophole 193 of tax avoidance represented by "the practice of creating losses through transactions between members of a family and close corporation," 2 which practice also has been described as "the artificial taking and establishment of losses where property was shuffled back and forth between various legal entities owned by the same persons or person." 3Petitioner was able to make transfers of the stocks in question indirectly to each of three corporations which she wholly owned and controlled. The situation was one in which, due to friendly control through persons who were by marriage closely associated with petitioner, and who were willing to lend their assistance to petitioner, at no loss or194 inconvenience to themselves, petitioner was able to create short-term capital losses from securities transactions which did not result, however, in any "economically genuine realizations of losses" to herself. McWilliams v. Commissioner, supra.The blocks of stock of West Penn Electric Co. and of New York Water Service Co. passed from Frances Boehm to her wholly owned corporations which, although distinct legal entities, had an economic identity with Frances Boehm because she owned them completely. In the light of the realities of economic interests, those three corporations were her alter ego, Higgins v. Smith, 308 U.S. 473">308 U.S. 473.In enacting section 24 (b) of the 1939 Code, the Congress struck out losses from sales of property made through certain specified transactions, whether made directly or indirectly, and one of the proscribed transactions was a sale between an individual and a corporation more than 50 per cent of the outstanding stock of which was owned by such person. Petitioner cannot avoid the prohibition contained in section 24 (b) (1) (B) by resorting to other parts of section 24 (b), namely, the 195 definition contained in subsection (2) (D), under the facts surrounding her transactions. Neither can she succeed in avoiding the 411 reach of section 24 (b) (1) (B) by invoking the provisions of section 24 (b) (1) (A) together with the definition contained in (2) (D). To countenance such effort to play one provision of section 24 (b) against other provisions of the same section not only would defeat the intendment of section 24 (b) as a whole, but also would be in violation of the specific wording of the general clause contained in (b) (1) which states that no deductions shall in any case be allowed in respect of losses from direct or indirect sales or exchanges of property.In considering the applicability of section 24 (b) to the facts of this case, it is proper and necessary to take into account each step of what transpired, to consider the several steps as part of single dealings of petitioner with her own property, and to scrutinize the whole of each plan from its beginning to its ending. Petitioner, despite the steps which were taken, did not part with control over each block of stock; her economic wealth was not in fact reduced; she did no more than bring about196 a shifting of cash from each one of her three wholly owned corporations to her own pocket, and a relocation of her securities from her hands to her incorporated depositories. Therefore, her purported losses were wholly illusory ones.Prior to the enactment of section 24 (b) of the 1939 Code, the courts had to consider without the aid of such statutory provision a great variety of transactions representing the continuing contest between taxpayers, who sought to reduce taxes, and the Government. As was observed in McWilliams v. Commissioner, supra, "Securities transactions have been the most common vehicle for the creation of intra-family losses." Without such specific statutory provisions as are embodied in section 24 (b), a plug for tax statute loopholes, the courts developed and applied rules of construction of the basic provisions of the Internal Revenue Code, and its predecessor revenue acts. The enactment of section 24 (b) ought to be sufficient statutory authority to make clear the transactions which give rise to deductible loss from a sale or exchange of property, and we should not find it necessary to go back to the authority of many decisions197 dealing with the problem presented here. It is sufficient to recall what was said in Shoenberg v. Commissioner, 77 F. 2d 446, 449, certiorari denied 296 U.S. 586">296 U.S. 586, as follows:A loss as to particular property is usually realized by a sale thereof for less than it cost. However, where such sale is made as part of a plan whereby substantially identical property is to be reacquired and that plan is carried out, the realization of loss is not genuine and substantial; it is not real. This is true because of taxpayer has not actually changed his position and is no poorer than before the sale. The particular sale may be real, but the entire transaction prevents the loss from being actually suffered. Taxation is concerned with realities, and no loss is deductible which is not real.412 The arrangements of petitioner respecting her two blocks of stock were no more than an attempt to choose a time for realizing tax losses on her investments which, in reality, were continued without interruption. McWilliams v. Commissioner, supra.Under all of the facts and circumstances, the issue here198 cannot be resolved by treating the sales by petitioner to her mother-in-law and to her father-in-law as conclusive. The issue is not limited to or restricted by those transactions. It is held that the provisions of subsection (2) (D), considered with those of section 24 (b) (1) (A), are not relevant or material to the issue, and are not applicable to the question before us. It is held, further, that the provisions of section 24 (b) (1) (B) apply, and, therefore, that no loss deductions with respect to petitioner's sales of her securities are allowable.Decision will be entered for the respondent. Footnotes1. SEC. 24. ITEMS NOT DEDUCTIBLE.(b) Losses From Sales or Exchanges of Property. -- (1) Losses disallowed. -- In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly -- (A) Between members of a family, as defined in paragraph (2) (D);(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;* * * (2) Stock ownership, family, and partnership rule. -- For the purposes of determining, in applying paragraph (1), the ownership of stock -- * * (D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; * *↩2. H. Rept. No. 704, 73d Cong., 2d Sess., p. 23 (1939-1 C. B. (Part 2) 554, 571); S. Rept. No. 558, 73d Cong., 2d Sess., p. 27 (1939-1 C. B. (Part 2) 586, 607).↩3. H. Rept. No. 1546, 75th Cong., 1st Sess., p. 28 (1939-1 C. B. (Part 2) 704, 724).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620900/	WEAVER PAPER CO., INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWeaver Paper Co. v. CommissionerDocket No. 9272-77.United States Tax CourtT.C. Memo 1980-72; 1980 Tax Ct. Memo LEXIS 511; 39 T.C.M. (CCH) 1233; T.C.M. (RIA) 80072; March 17, 1980, Filed 511 Held, compensation paid to petitioner's principal officer and stockholder was reasonable in amount and was paid for services rendered; hence, it is fully deductible under sec. 162(a)(1), I.R.C. 1954. William S. Duke and Richard A. Ball, Jr., for the petitioner. Thomas R. Thomas, for the respondent. DRENNENMEMORANDUM FINDINGS OF FACT AND OPINION DRENNEN, Judge: Respondent determined the following deficiencies in petitioner's income taxes: FYEJune 30,Deficiency1974$32,456.79197547,181.26The only issue for decision is whether payments made by petitioner to T.W. Weaver, Jr., during each of the taxable years in excess512 of the $125,000 amount allowed by respondent constituted reasonable compensawtion fully deductible by petitioner under section 162(a)(1), I.R.C. 1954. 1FINDINGS OF FACT Some of the facts were stipulated and they are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. Weaver Paper Co., Inc. (hereinafter petitioner) was incorporated on October 2, 1959, under the laws of the State of Alabama. At the time it filed its petition herein, its principal place of business was Montgomery, Ala. Petitioner is an accrual basis taxpayer and it filed its corporate tax returns for the taxable years in issue on a July 1-June 30 fiscal year basis with the Internal Revenue Service Center, Chamblee, Ga.The moving force behind petitioner's operation was T.W. Weaver, Jr. (hereinafter Weaver). At all times relevant to this case, Weaver owned 97 percent of petitioner's common stock (its only class of stock), and he was petitioner's chief executive officer and chariman513 of the board. The remaining stock in petitioner was owned by Weaver's wife. Weaver was 61 and 62 years of age during the taxable years in issue. He began work in the paper industry in 1933 with the Strickland Paper Co. During his employment with Strickland Paper Co., Weaver became a salesman, a position he held until he terminated his employment in 1947. In 1947 Weaver was hired by the S. P. Richards Paper Co. to run a branch of its operations in Montgomery, Ala. He had virtually the same selling area (Alabama, western Georgia, and portions of Florida) as he had with Strickland Paper Co., and he was paid 65 percent of gross profits to operate the branch. In addition to selling paper products, Weaver also performed every other needed job, including establishing contacts with paper suppliers. In 1952 Weaver purchased the branch from the S. P. Richards Paper Co. and renamed it the Weaver Paper Co. This company was operated as a sole proprietorship until it was incorporated in 1959. The principal business of both petitioner and its predecessor was the sale of fine printing paper and paper products at wholesale to printing companies and office supply concerns in Alabama and514 Western Georgia. Petitioner was a distributor of paper products it obtained from paper manufacturers; petitioner did not manufacture any products. The following table sets forth the gross receipts, gross income, taxable income, and dividends paid by the petitioner for the years ended June 30, 1970, through June 30, 1975: YearGrossGrossTaxableDividendsEndedReceiptsIncomeIncomePaid 26/30/70$1,617,666$327,648$ 76,593$ 4,9706/30/711,813,269384,56887,1484,9706/30/721,997,867425,21992,5504,9706 /30/732,163,327493,433132,7764,9706/30/742,703,936709,621191,0954,9706/30/752,916,622813,321255,52613,860Petitioner's retained earnings as of June 30, 1973, June 30, 1974, and June 30, 1975, were $375,259, $448,751.10, and $577,571.49, respectively. As was the case both during the taxable years in issue and the preceding years of petitioner's and its predecessor's existence, Weaver was involved in every aspect of the business operation. He acted as both salesman515 and executive-manager, as well as filling in wherever necessary in petitioner's operations. His managerial duties included: Supervising sales, credit, billing, shipping, and inventory buying; maintaining contacts with paper sources; supervising warehouse operations; and anticipating customers' needs. Weaver also made sales calls on customers. His typical work schedule was from 6:30 a.m.-6:00 p.m., Monday-Friday, and he also regularly worked on Saturday and Sunday. Weaver had an excellent reputation in the paper industry for running a fine operation and for being a resourceful salesman. As a result of Weaver's efforts, petitioner carried a number of quality paper-product lines. The product lines eventually acquired by petitioner had been initially obtained by Weaver when he worked for Strickland Paper Co. and S. P. Richards Paper Co. Weaver had been able to maintain these contacts throughout the years. It was Weaver's opinion that, if he left the employ of petitioner in order to work for a new paper distributor, he could take virtually all of petitioner's sales accounts with him. For the taxable years prior to those in issue, Weaver received the following amounts of compensation516 as salaries and bonuses from petitioner: FYEJune 30,Compensation1970$67,278197182,000197282,000197397,000For the fiscal year 1973, Weaver's compensation included a base salary of $50,000, the remainder being comprised of bonuses. No specific breakdown was provided for the other years. On September 14, 1973, at the regular meeting of petitioner's board of directors, Weaver's salary was set at $100,000 per year for the taxable year July 1, 1973-June 30, 1974. On March 10, 1974, at a special meeting of the board of directors, it was agreed between petitioner and Weaver that, effective July 1, 1973, Weaver was to be paid an annual salary of $100,000 plus a bonus of 30 percent of petitioner's net profits before deductions for Federal and State income taxes and payments to any pension or profit-sharing plan. The agreement provided that Weaver's duties consisted of those performed previously, including "management and outside salesman duties." Pursuant to this salary and bonus agreement, Weaver received compensation of $192,618 for the fiscal year ending June 30, 1974, and $223,294 for the fiscal year ending June 30, 1975.These amounts do not517 include deferred compensation in the form of payments to petitioner's profit-sharing plan, which payments approximated $10,000 in each of the years. 3The work which Weaver performed during the taxable years in issue was not substantially greater than that performed in earlier years, although petitioner's sales increased during this period and as sales increased so did business problems. Weaver did not acquire for petitioner any substantial new accounts during either taxable year. During the taxable years in issue, petitioner had 13-14 employees 4 in addition to Weaver. One of these employees, Charles Norris, acted as the office manager and supervised two other office workers during Weaver's absences. He was also petitioner's secretary-treasurer. Norris received compensation of $14,300 in the fiscal years ending June 30, 1974, and $15,800 in the fiscal year ending June 30, 1975. Included among 13-14 other employees of petitioner518 were 4-5 other paper salesmen. For the most part these salesmen had little experience in selling paper products prior to being hired by petitioner and, with one exception, they had worked for petitioner for only short periods of time prior to the taxable years in issue. One salesman had started his employment with petitioner 15-16 years prior to the taxable years in issue, although this employment had been interrupted for an undisclosed period. Weaver hired these salesmen principally to service customer accounts which Weaver had developed but which he could no longer adequately maintain because of the quantity of petitioner's business. Although he no longer serviced the accounts handled by these other salesmen, Weaver still maintained contact with the customers by telephone or by personal visits. Few new accounts were established by these salesmen. The following table sets forth the respective total sales figures of Weaver and the other salesmen for the taxable years in issue: FYE June 30,FYE June 30,19741975Weaver$1,592,624.74$1,750,393.17Other salesmen1,137,429.151,223,168.21The salesmen hired by Weaver were paid a base sawlary and519 a bonus of 10 percent of the net profits from their individual accounts. Automobiles were also provided to these salesmen and they were reimbursed for expenses. Because of the imprecise nature of the evidence, it can only generally be said that these salesmen annually earned between $10,000 and $22,000 during the taxable years in issue. Paper Merchant Performance, 1974, is a publication printed by the National Paper Trade Association, Inc., which provides industry-wide statistical data on paper merchant operations. Southeastern Paper Co. (hereinafter Southeastern), Louisville, Ky., and Strickland Paper Co. (hereinafter Strickland), Birmingham, Ala., are wholesale paper merchants similar to petitioner. For purposes of comparison, the following chart sets forth relevant data concerning: (1) Petitioner's operations for the two fiscal years in issue; (2) other printing merchants' operations (those located other than in Chicago, Detroit, New York, and Philadelphia) most comparable in size to petitioner as contained in the Paper Merchant Performance, 1974; 5 (3) Southeastern's operations for two fiscal years ending in 1974 and 1975; and (4) Strickland's operations for the two calendar520 years 1974 and 1975. 6NationalWeaverWeaverAverageFYE June 30, 1974FYE June 30, 19751974GrossReceipts$2,703,936$2,916,622$5,151,942Costofgoodsold$2,046,9582,180,3254,151,693GrossProfit656,978736,2971,000,249Operating expense462,776505,452725,093Net operating profit194,202230,845275,156Net profit before taxes194,083263,144282,225Net income after taxes103,686142,680145,936SoutheasternSoutheasternFYE Sept. 30, 1974FYE Sept. 30, 1975Gross Receipts$8,393,572$7,619,251Cost of goods sold6,940,1306,179,436Gross Profit1,453,4421,439,815Operating expense1,305,8231,338,256Net operating profit147,619101,559Net profit before taxes90,03650,005Net income after taxes50,08136,512Strickland n6aStrickland19741975Gross Receipts$2,611,000$2,386,000Cost of goods sold*Gross Profit660,247588,543Operating expense n6bNet operating profitNet profit before taxesNet income after taxes75,81348,827521 A comparison of the foregoing information reveals petitioner as one of the more successful operations for its size. Weaver is due a large part of the credit for this success. Henry Harris (hereinafter Harris) was chairman of the board of Southeastern, and he was paid approximately $67,000 annually during the period at issue. Harris had been in the paper business since 1947, and he owned 50 percent of the stock of Southeastern. As chairman of the board, he worked 40 hours per week, primarily performing executive duties, although he did maintain a few sales accounts. Harris was also on advisory committees for a number of paper mills. Southeastern carried many of the same paper product lines as petitioner, although it had a larger volume of "direct business" 7 than did522 petitioner. Southeastern paid its salesmen a percentage of the gross profit (selling price less cost of goods sold) 8 derived from their sales. The commission percentage varied from 25 percent to 45 percent, depending on a variety of factors, including the salesman's experience. A salesman who was given existing sales accounts did not receive as large a commission percentage as did the salesman that developed the accounts. Southeastern did not pay base salaries to its salesmen. Southeastern's top salesman earned approximately $65,000 in fiscal year 1973 and $75,000 in fiscal year 1974 on sales of approximately $1.2-$1.3 million. He was paid on a 30-percent basis.Harris would pay a 35-percent to 40-percent commission to a salesman who had new sales in the quantity and quality of paper that Weaver's sales approximated523 in petitioner's fiscal year ending June 30, 1975. Such a salesman in Harris' opinion would be worth $175,000 to $180,000 per year for only selling. Harris would not require the individual to perform any management functions. Furthermore, it was Harris' opinion that the individuals who performed those jobs for Southeastern that Weaver performed for petitioner earned approximately $268,500 in 1973 and $293,500 in 1974. Having heard the evidence presented at trial concerning the success of petitioner's business and the efforts of Weaver, and based on his business judgment, Harris considered Weaver to be worth the compensation paid to him during the taxable years in issue.If he had performed the same duties for Southeastern that he performed for petitioner, Harris would have paid Weaver more than petitioner had. George B. Elliott (hereinafter Elliott) was president of Strickland, and he received compensation of $50,129 for 1973, $52,389 for 1974, and $84,118 for 1975. This compensation consisted of a salary of $36,000 and a bonus of 25 percent of the profits. Elliott had been in the paper business for over 20 years and he was the controlling shareholder of Strickland. As president, 524 he worked a 40-hour week, principally performing executive duties. Strickland also employed an office manager and a credit-manager bookkeeper to perform some of the administrative functions.In total, Strickland employed about 20 people. In addition to his executive duties, Elliott also did some selling.During the calendar years 1973-1975, Elliott's sales approximately amounted to $360,000, $443,000, and $536,000, respectively. These figures represented between 20 percent and 30 percent of Strickland's Birmingham sales. With the exception of Trainees, who were initially paid a salary, Strickland also paid its salesmen a percentage of gross profits instead of a base salary. The percentage paid to a salesman varied from 26 percent to 34 percent, again depending on a variety of factors. In Elliott's opinion, if Weaver brought $1,750,000 of quality paper sales to Strickland, Weaver would rate a commission percentage of 30 percent and would earn approximately $150,000. Elliott also would not require such a salesman to perform any management functions. In the statutory notice of deficiency respondent determined that $125,000 was reasonable compensation for Weaver for each of525 the taxable years in issue. The remaining amounts paid to Weaver were determined to be unreasonable and the deduction thereof by petitioner was disallowed. No evidence was introduced concerning the basis on which respondent made his determination. ULTIMATE FINDING OF FACT The compensation paid to Weaver in each of the taxable years was reasonable in amount. OPINION The sole issue for decision is whether payments made by petitioner to Weaver, petitioner's president and chairman of the board, in each of its taxable years ending in 1974 and 1975, constituted compensation which was reasonable in amount and, therefore, deductible under section 162(a)(1), to the extent that the payments exceeded the $125,000 amounts allowed by respondent. Section 162(a)(1) allows as a deduction "a reasonable allowance for salaries or other compensation for personal services actually rendered" when such allowances are "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." In order to be deductible, compensation must be both reasonable in amount and in fact paid purely for services. 9Sec. 1.162-7(a), Income Tax Regs.Electric & Neon, Inc. v. Commissioner,56 T.C. 1324">56 T.C. 1324, 1340 (1971),526 affd. without opinion 496 F. 2d 876 (5th Cir. 1974); Nor-Cal Adjusters v. Commissioner,503 F. 2d 359, 362 (9th Cir. 1974), affg. a Memorandum Opinion of this Court; Klamath Medical Service Bureau v. Commissioner,29 T.C. 339">29 T.C. 339, 347 (1957), affd. 261 F. 2d 842 (9th Cir. 1958), cert. denied 359 U.S. 966">359 U.S. 966 (1959). Bonuses paid to employees, if paid for services and, when added to salaries, do not exceed a reasonable compensation for services, are also deductible under section 162(a)(1). Sec. 1.162-9, I/ncome Tax Regs. The question of reasonableness of the compensation is one of fact which must be answered on the basis of all the facts and circumstances in a particular case. Charles Schneider & Co. v. Commissioner,500 F. 2d 148, 151 (8th Cir. 1974), cert. denied 420 U.S. 908">420 U.S. 908 (1975), affg. 527 a Memorandum Opinion of this Court; Levenson & Klein, Inc. v. Commissioner,67 T.C. 694">67 T.C. 694, 711 (1977); Pepsi-Cola Bottling Co. of Salina, Inc. v. Commissioner,61 T.C. 564">61 T.C. 564, 567 (1974), affd. 528 F. 2d 176 (10th Cir. 1975). 10 The factors generally considered relevant in determining the reasonableness of compensation include: * * * the employee's qualifications; the nature, extent and scope of the employee's work; the size and complexities of the business; a comparison of salaries paid with the gross income and the net income; the prevailing general economic conditions; comparison of salaries with distributions to stockholders; the prevailing rates of compensation for comparable positions in comparable concerns; the salary policy of the taxpayer as to all employees; and in the case of small corporations with a limited number of officers528 the amount of compensation paid to the particular employee in previous years. * * [Mayson Mfg. Co. v. Commissioner,178 F.2d 115">178 F.2d 115, 119 (6th Cir. 1949), revg. a Memorandum Opinion of this Court.] Commercial Iron Works v. Commissioner,166 F.2d 221">166 F. 2d 221, 224 (5th Cir. 1948), affg. a Memorandum Opinion of this Court; Kennedy v. Commissioner,72 T.C. 793">72 T.C. 793, 801 (1979); Pepsi-Cola Bottling Co. of Salina v. Commissioner,supra at 568; No single factor is determinative. Mayson Mfg. Co. v. Commissioner,supra.Furthermore, the compensation amount will be closely examined where the payments at issue are those of a corporation to a controlling shareholder. Tulia Feedlot, Inc. v. United States,513 F.2d 800">513 F.2d 800, 805 (5th Cir. 1975). Respondent's determination is presumed to be correct and petitioner has the burden of proving it otherwise. Botany Worsted Mills v. Commissioner,278 U.S. 282">278 U.S. 282, 292 (1929); Rule 142(a), Tax Court Rules of Practice and Procedure.Whether the payments were intended to be compensation purely for services is also a factual question. Paula Construction Co. v. Commissioner,58 T.C. 1055">58 T.C. 1055, 1059 (1972),529 affd. without opinion 474 F. 2d 1345 (5th Cir. 1973). Regardless of the reasonableness of the total compensation paid, it is a condition precedent to the allowability of a deduction that the payments be solely for services rendered. Electric & Neon, Inc. v. Commissioner,supra at 1340. Factors considered in determining whether payments are purely for services include: (1) The corporation's history of divided payments; (2) the availability of funds for distribution; (3) a comparison of gross and net income of the corporation in relation to the compensatory amount; and (4) the method used to compute compensation. Miles-Conley Co. v. Commissioner,173 F. 2d 958 (4th Cir. 1949); Mayson Mfg. Co. v. Commissioner,supra;Klamath Medical Service Bureau v. Commissioner,supra.Petitioner argues that because Weaver was both a salesman and a manager, the value of each of those duties must be ascertained in order to determine whether the total compensation paid to Weaver in each of the taxable years was reasonable. Under the particular facts and circumstances of this case, we agree that consideration530 should be given to Weaver's value to petitioner both as a salesman and as chief executive officer and manager. 11 Each contributed separately to the successful profitability of petitioner's business. Weaver's sales activities produced over 50 percent of petitioner's gross receipts with a rather high gross profit margin. Weaver's executive and managerial services and activities were largely responsible for petitioner's low percentage of operating expenses to sales and to its considerable net profits. Petitioner contends that a reasonable compensation for Weaver's sales efforts is best measured by using as a guide the sales commissions paid by Southeastern and Strickland to their salesmen. Based on such commissions, petitioner asserts that Weaver's sales in fiscal years 1974 and 1975 would have earned him minimum commissions of $133,000 and $150,000, respectively. 12 Petitioner further contends that, based on petitioner's performance during each of the taxable years, as reflected in the comparison of its performance and that of Southeastern, Strickland, and the national average for paper531 merchants, Weaver's managerial efforts were worth $100,000. Because the sum of the component amounts for each of the taxable years exceeds that compensation actually paid to Weaver, petitioner concludes that the total amount of compensation paid in each year was reasonable. Respondent argues that Weaver's compensation was unreasonable to the extent it exceeded $125,000 in each of the taxable years because the services532 performed did not justify the compensation received. His argument is principally based on a comparison of Weaver's compensation in each of the years with: (1) The compensation paid to Weaver for similar services in years prior to those in issue; (2) the increases in petitioner's gross income and dividend distributions for the fiscal years 1970-1975; and (3) the compensation paid to Elliott as president of Strickland. For the taxable years in issue Weaver received total compensation in the respective amounts of $192,618 and $223,294. Although the agreement pursuant to which these amounts were paid was not executed until the third quarter of the first taxable year at issue and the amounts paid were considerably larger than the compensation received by Weaver in prior years, we conclude, having considered all the factors, that the compensation received by Weaver in each of the taxable years in issue was reasonable for the services performed by him. Accordingly, petitioner is entitled to a section 162(a)(1) deduction in the same amounts. As a basis for our decision, we mention only those factors which we consider most relevant. In light of Weaver's rather unique relationship with533 petitioner, the factors we consider of major importance are: The nature of the services to be performed, their value to the employer, the responsibilities they entail, the time required of the employee in discharge of his duties, his capabilities and training, and the amount of compensation paid in proportion to net profits. See Laure v. Commissioner,70 T.C. 1087">70 T.C. 1087, 1098 (1978), on appeal (6th Cir. Feb. 27, 1979), a case similar to this. And, as we also said in Laure: One of the most important factors in determining the reasonableness of compensation is the amount paid to similar employees by comparable employers. * " The evidence presented indicates that Weaver would have earned a similar amount had he worked for an employer other than petitioner and performed the same services. The chief executive officers of two other paper merchants testified. Harris, chairman of the board of Southeastern Paper Co., testified that the several individuals who performed those jobs for Southeastern that Weaver performed for petitioner earned approximately $268,500 in 1973 and $293,500 in 1974. Additionally, Harris was impressed with the manner and efficiency with which534 Weaver operated petitioner as reflected in the financial results achieved by petitioner in each of the taxable years. Furthermore, he was of the opinion that a salesman with sales similar in amount and quality to those of Weaver in 1975 would have earned $175,000-$180,000 for selling alone. Harris would not have required such a salesman to perform any administrative or executive duties. Based on his business judgment, Harris believed Weaver to be worth the compensation paid to him during the taxable years in issue. In a similar vein, Elliott, president of Strickland Paper Co., a witness called by respondent, was also impressed with the manner and efficiency with which Weaver operated petitioner. He testified that a salesman with sales similar in amount and quality to those of Weaver in 1975 would earn approximately $150,000. While we are aware that attempts to determine what Weaver would have earned on his sales had he worked for other companies is imprecise, nonetheless we find the testimony of Harris and Elliott very persuasive. Both witnesses were forthright and candid, and each had considerable experience in the paper industry. The companies of both witnesses used similar535 methods to compensate their salesmen. We do not find persuasive respondent's argument that the percentage commissions paid to other salesmen were irrelevant because Weaver received a percentage of petitioner's net profits rather than a percentage of gross profits from his sales. 13 While it is certainly necessary to examine the method by which an individual is compensated, the ultimate question is whether the compensation received was reasonable for the services rendered. 14 In considering the value to petitioner of Weaver's sales efforts, it is certainly useful to know how other paper companies compensated their salesmen for similar efforts. 15 That petitioner did not compensate Weaver or its other salesmen in a similar manner, while certainly a consideration, does not diminish the usefulness of the evidence. 536 With regard to Weaver's sales activities alone, we note that the gross receipts on his accounts represented about 60 percent of the total gross receipts of petitioner for both fiscal years 1974 and 1975. His total compensation was about 7.5 percent of petitioner's gross receipts for both years and was about 12.5 percent of the gross receipts from his own accounts for both years. His total compensation was less than 50 percent of petitioner's gross profit on his own accounts, whereas Weaver received 65 percent of the gross profit of the Montgomery branch of S.P. Richards Paper Co., the management of which he took over in 1947. From these statistics it would appear that Weaver's value to petitioner as a salesman and account manager alone would almost justify the compensation he was paid in 1974 and 1975. Furthermore, Weaver's extensive and longstanding contacts with the producers of high quality paper products assured petitioner of a reliable source of supply of the variety of paper products demanded by its customers. Also, despite the rather sizable compensation paid to Weaver, his compensation was about the same or less than the taxable income reported by petitioner in each of537 those years.In addition to his sales duties, Weaver performed considerable management duties and he was involved in every aspect of petitioner's operation. Petitioner's success reflected Weaver's abilities and efforts. Both Harris and Elliott attested to the efficient manner with which Weaver operated petitioner. While it is true that he earned more than either Harris or Elliott, it is also true that Weaver worked considerably harder and that petitioner was a more profitable operation than either Southeastern or Strickland. (See the comparative figures set forth in the findings of fact.) Weaver performed duties for petitioner which were performed for Southeastern and Strickland by Harris and Elliott, respectively, and other employees. It is only reasonable that Weaver receive greater compensation. Furthermore, it is not unreasonable that Weaver in part be compensated for his efforts by means of a percentage of net profits arrangement because it was Weaver's efforts which were crucial in the realization of those profits. Numerous cases have approved compensation based on a percentage of profits. See Laure v. Commissioner,supra at 1100, and the cases cited538 therein. As to the question of whether the compensation paid to Weaver was paid purely for services, there is no evidence based upon which it could reasonably be concluded that part of the compensation paid was a disguised distribution of profits. Although Weaver's bonus consisted of a percentage of petitioner's net profits, that does not mean that it was a disguised dividend. Perhaps, in a small corporation such as petitioner, one of the best measures of the value of a key employee-stockholder's services is the corporation's profitability. It is interesting to note that Elliott was also paid a bonus based on Strickland's profits. Moreover, as previously noted, many cases have approved compensation based on a percentage of profits. Laure v. Commissioner,supra.After payment of the compensation to Weaver, petitioner had considerable taxable income in each of the years in issue and it paid both income taxes and dividends. This was not a situation where a corporate officer was trying to draw off corporate earnings under the guise of salaries. See generally Boyle Fuel Co. v. Commissioner,53 T.C. 162">53 T.C. 162 (1969); Klamath Medical Services Bureau v. Commissioner,supra;539 Northlich, Stolley, Inc. v. United States,177 Ct. Cl. 435">177 Ct. Cl. 435, 368 F.2d 272">368 F.2d 272 (1966). In summary, we are persuaded, based on a consideration of all the factors involved, that petitioner carried its burden and established that the compensation paid to Weaver in each of the taxable years in issue was reasonable in amount and deductible pursuant to section 162(a)(1). In reaching this conclusion, we are not unmindful of those factors, particularly the amounts of compensation paid to Weaver in prior years for services similar to those performed in the years in issue, which arguably indicated that Weaver's compensation was excessive. Weaver testified that the compensation arrangement adopted by petitioner in fiscal year 1974 was intended to pay Weaver for the value of his services. Based on the evidence presented, we are convinced that the compensation paid to Weaver for his services was within the zone of reasonableness. Decision will be entered for the petitioner.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable years in issue, unless otherwise indicated.↩2. Dividends for the 1970-1974 fiscal years were $5 per share. For fiscal year 1975 the dividend increased to $15 per share.↩3. Respondent did not disallow any deduction for a payment to a profit-sharing plan.↩4. The job categories of the other employees were as follows: Three office workers; 4-5 paper salesmen; and 6 warehouse workers and truck drivers.↩5. Southeastern submitted its financial data for inclusion in the industry-wide data compiled in the Paper Merchant Performance. Evidence was not introduced as to whether petitioner and Strickland also submitted their financial data. ↩6. Complete financial data is not provided.↩. Specific information was not provided as to these amounts. n6a The figures for Strickland Paper Co. includes figures from three different operations: Strickland Paper Co., Birmingham; Strickland Paper Co., Mobile; and Strickland Packaging. 6b Although figures were not given, Strickland's operating expenses, as a percentage of gross receipts, equaled 20.37 percent (1974) and 22.31 percent (1975).↩7. "Direct business" is a term used when a wholesale paper merchant places an order with the paper manufacturer and the product is shipped directly to the merchant's customer. The merchant's profit margin on such sales is low. ↩8. The gross profit on each account varied. On a company-wide basis, Southeastern had a gross profit percentage in the low 20's.↩9. Petitioner does not argue that the regulatory provisions which discuss contingency compensation paid pursuant to a "free bargain" between employer and employee are applicable to the bonus agreement entered into by petitioner and Weaver on Mar. 10, 1974. Sec. 1.162-7(b)(2), Income Tax Regs.↩10. See also three of the most recent Court decisions on reasonable compensation: Kennedy v. Commissioner,72 T.C. 793">72 T.C. 793 (1979); Drexel Park Pharmacy v. Commissioner,T.C. Memo 1979-518">T.C. Memo. 1979-518; and Lundy Packing Co. v. Commissioner,T.C. Memo. 1979-472↩.11. See Appelton Electric Co. v. Commissioner,T.C. Memo. 1967-211↩.12. Petitioner calculated these figures by multiplying Weaver's sales for each of the fiscal years by petitioner's gross profit percentage (24.3 percent in fiscal year 1974; 25.24 percent in fiscal year 1975) for each of the years. The product of this multiplication was then multiplied by percentage commissions of 25 percent and 45 percent. A rough average of these two products was then made. ↩Weaver's 1974 salesPetitioner's gross profit margin$1,592,62424.3 percent$387,007$ 387,00725 percent$ 96,751$ 387,00745 percent$174,153Average$133,000Weaver's 1975 salesPetitioner's gross profit margin$1,750,39325.24 percent$441,799$ 441,79925 percent$110,449$ 441,79945 percent$198,809Average$150,00013. In his original brief (p. 18) respondent argues that the formula for determining Weaver's compensation had no connection with the work performed by Weaver because Weaver "was paid a percentage of total gross sales, rather than sales attributed solely to him." It was in fact based on net profits after Weaver's base salary.↩14. Boyle Fuel Co. v. Commissioner,53 T.C. 162">53 T.C. 162, 171 (1969); cf. Appleton Electric Co. v. Commissioner, supra.↩15. In this regard it is recognized that a particular trade practice must not be slavishly applied in determining reasonable compensation. Ecco High Frequency Corp. v. Commissioner,167 F. 2d 583 (2d Cir. 1948), affg. a Memorandum Opinion of this Court; Miles-Conley Co. v. Commissioner,173 F. 2d 958↩ (4th Cir. 1949).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620901/	ALBERT RUSSEL ERSKINE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Erskine v. CommissionerDocket Nos. 36400, 41514.United States Board of Tax Appeals26 B.T.A. 147; 1932 BTA LEXIS 1360; May 24, 1932, Promulgated 1360 The petitioner in 1922 entered into an agreement to work for the Studebaker Corporation exclusively for a period of between four and five years. The contract provided that the petitioner should receive a cash salary of $100,000 a year and "have the right and option to buy and receive" a certain number of the shares of preferred and common stock of the corporation, to be determined upon the basis of the annual profits, upon payment to the corporation of a nominal price per share. The corporation purchased the shares in the open market at a cost of several times the agreed price to the petitioner and placed them in escrow subject to the terms of the agreement. Held, that the agreement in question was essentially an employment contract and all that was realized therefrom by the petitioner constituted compensation for services. The amount of such compensation taxable to the petitioner in each year on account of the receipt of the rights to buy shares of stock is the difference between their market value on the date received and their price to the petitioner. Held, further, that the assignments by the petitioner to his wife of the rights to acquire certain of the shares does1361 not relieve the petitioner from tax liability thereon. Held, further, that the cash dividends declared on the shares of stock while held in escrow and paid to the petitioner or his wife as the shares were acquired by them constitute additional compensation taxable to the petitioner as ordinary income and not as dividends. Robert N. Miller, Esq., and J. Robert Sherrod, Esq., for the petitioner. W. F. Wattles, Esq., and B. D. Daniels, Esq., for the respondent. SMITH 147 These proceedings, which were consolidated for hearing, involve deficiencies as follows: Docket No.YearDeficiency364001923$302,534.881924222,705.5241514192579,297.371926127,471.16The greater part of the deficiency of each year results from additions to the compensation received by the petitioner from the Studebaker Corporation. The issues common to each of the years are - (1) whether the excess in market value of the right to buy certain shares of stock of the Studebaker Corporation received in each of the years 1923 to 1926, inclusive, over the price to be paid for the shares by the petitioner or his assignee under1362 a certain contract is taxable 148 to the petitioner as compensation for services performed; (2) whether the compensation, if any, represented by the rights of the petitioner to acquire the shares of stock is taxable to petitioner in the year of the receipt of the employment contract, or the years of the receipt of the shares of stock; (3) whether the assignments by the petitioner to his wife of the rights to acquire certain of the shares rendered them taxable to the assignee and not the assignor; and (4) whether the cash dividends declared on the shares of stock while held in escrow and paid to the petitioner or his assignee upon receipt of the shares are taxable to the petitioner as dividends or as ordinary income. FINDINGS OF FACT. The petitioner resides at South Bend, Indiana. He is president of the Studebaker Corporation and the Pierce Arrow Motor Car Corporation. He entered the employ of the Studebaker Corporation in October, 1911, as treasurer and a member of the executive committee of the board of directors. Prior to that time he had served as vice president and director of the Underwood Typewriter Company treasurer and director of the Yale & Towne Manufacturing1363 Company, and chief clerk and general auditor of the American Cotton Company. The Studebaker Corporation was organized under the laws of the State of New Jersey in 1911. It was assisted in its organization by Goldman, Sachs & Company and Lehman Brothers, investment bankers of New York, Its stock issue consisted of $13,500,000 par value of preferred stock and 30,000 shares of no par value common stock. The 30,000 shares of common stock were issued to the stockholders of the Studebaker Brothers Manufacturing Company in exchange for the stock of that company and of the Everett Metzger and Flanders Company, commonly known as the E.M.F. Company, which the Studebaker Brothers Manufacturing Company had previously acquired. Upon entering the service of the Studebaker Corporation in 1911, the petitioner found the business badly in need of reorganization. The Studebaker Brothers Manufacturing Company had been engaged principally in manufacturing horse-drawn vehicles and harness, at South Bend, Indiana. It was managed by the several Studebaker brothers and their brothers-in-law. The E.M.F. Company had been manufacturing automobiles at Detroit, Michigan, under a different management. 1364 After the petitioner became vice president of the Studebaker Corporation in 1913, he brought about a reorganization of the entire business. In 1915 the petitioner was made president of the Studebaker Corporation to succeed Frederick S. Fish, who had held that position 149 since the corporation was organized in 1911 and who, as a controlling stockholder and director, had been largely instrumental in procuring the petitioner's services. During the war period the Studebaker Corporation manufactured a large quantity of horse-drawn vehicles and supplies for military use. After the armistice, the petitioner immediately undertook to liquidate that department of the business. This was finally accomplished in 1919 and 1920. The profits of the Studebaker Corporation increased from about one and one-half million dollars in 1911 to over nine million dollars in each of the years 1919 and 1920. In 1921, which was an unfavorable year for most of the automobile manufacturers, its profits amounted to ten and one-half million dollars, while some of the other automobile manufacturers comparable to the Studebaker Corporation sustained heavy losses. In 1922 Frederick S. Fish, who1365 was then chairman of the board of directors, conceived the idea that it would be advantageous to the corporation to cause the petitioner to become one of its large stockholders. It was thought that the petitioner's interests would thereby be more securely tied in with the business and his services made more permanent. The petitioner then owned only 400 or 500 shares of the Studebaker Corporation stock. It had become known that several other large corporations were seeking to obtain the petitioner's services. After negotiations between the parties, the following contract was entered into, the terms of which were incorporated in a letter from Frederick S. Fish to the petitioner, dated June 27, 1922: At a meeting of the Executive Committee held on June 16, 1922, the Committee, in view of the very satisfactory and gratifying condition of the Corporation due in large measure to your able administration, and believing that the best interests of the Corporation will be served by some provisions by which you shall have the right to become the owner of a substantial stock interest in the Corporation, requests you to accept an entirely new contract upon the following terms, viz: 1. The1366 period covered by this contract shall be from January 1st, 1922, until the annual meeting of our stockholders in the year 1926. During the period covered by this contract, you shall not engage in any other business and shall not become an officer or director of any other corporation (except a charitable, civic, or benevolent corporation or voluntary association) without the consent of the board of directors. Consent is hereby granted to serve upon the Board of Directors of the Federal Reserve Bank of Chicago, the Board of Lay Trustees of the University of Notre Dame and commissioner on the Interstate Harbor Commission of Illinois and Indiana. 2. Your official position shall be that of president of the corporation, if elected by the board of directors, or some other position of not inferior dignity to which you may be elected or appointed by the board of directors, with residence in the United States. 150 3. Your salary shall be One hundred thousand dollars ($100,000) per annum, payable in monthly installments. (a) The corporation agrees during the year 1922 to deposit in escrow with Goldman, Sachs & Company, to be held subject to this agreement, ten thousand (10,000) 1367 shares of its seven per cent (7%) cumulative preferred stock and fifteen thousand (15,000) shares of its common stock. The corporation shall receive all dividends on each class of stock so deposited up to but not exceeding Seven dollars ( $7) per share per annum. All dividends in excess of Seven Dollars ( $7) per share per annum shall become a part of the principal of the escrow and shall be paid to you pro rata as you exercise from time to time the option hereinafter referred to. (b) If in one or more of the years 1922, 1923, 1924 or 1925, the net profits of The Studebaker Corporation and its subsidiary companies, as ascertained by and certified to by our regular auditors according to their practice heretofore prevailing, amount to Fifteen Million Dollars (15,000,000) or more, before deducting Federal income and excess profits taxes, you, or your assigns, shall have the right and option to buy and receive, at any time after the completion of the annual audit for any and each such year and prior to January 1, 1927, twenty-five per cent (25%) of each class of the escrowed stock (namely two thousand five hundred (2,500) shares of its seven per cent (7%) cumulative preferred stock1368 and three thousand seven hundred fifty (3,750) shares of its common stock), upon your paying to the corporation the sum of Twentyfive Dollars ( $25) per share plus accrued dividends for the seven per cent (7%) cumulative preferred stock and Ten Dollars ( $10) per share plus accrued dividends for the common stock. (c) If the total net profits of The Studebaker Corporation and its subsidiary companies for the five years (1922-1926 inclusive) ending December 31, 1926, as ascertained by and certified to by our regular auditors according to their practice heretofore prevailing, shall amount to Sixty Million Dollars ($60,000Ooo) or more, before deducting Federal income and excess profits taxes, you, or your assigns, shall have the right and option, at any time after the completion of the annual audit for the year 1926 and before January 1, 1928 to purchase all of the escrowed stock not previously sold and delivered to you, or your assigns, upon paying to the Corporation the sum of Twenty-five Dollars ( $25) per share for the seven per cent (7%) cumulative preferred stock and Ten Dollars ( $10) per share for the common stock, less the accumulated dividends thereon held as part of the principal1369 of the escrow, as above provided. If, however, said net profits shall not amount to Sixty Million Dollars ($60,000,000) but shall exceed Fifty Million Dollars ($50,000,000), before deducting Federal income and excess profits taxes, then the total number of shares which you, or your assigns, shall have the right and option to purchase shall be limited to five-sixth (5/6) of the number of shares of stock so deposited in escrow. If again, by reason of unforeseen difficulties, such as fires, riots, war, etc., the said net profits are less than Fifty Million Dollars ($50,000,000), the Corporation agrees at the end of such five-year period to consider the circumstances and make some reasonable adjustment of the matter, which adjustment you agree to accept without question, if it be approved by a majority of all of the Directors of the Corporation. (d) In the event of your death and any right or option to purchase stock under this contract has then accrued and has not been exercised by you, your executor, administrator, personal representatives or assigns, as the case may be, shall have the right to exercise such option. 151 In the event that the net profits of the Corporation, 1370 ascertained as hereinbefore provided, for any of the years covered by this contract up to and including the year of your death, shall average Twelve Million Dollars ($12,000,000) per annum, to the extent that you have not previously exercised your right and option to purchase the escrowed stock, your executors, administrators or assigns shall have the right and option to purchase at the prices hereinbefore provided the escrowed stock as follows: If you die in 1922, five thousand (5,000) shares of preferred stock and seven thousand five hundred (7,500) shares of common stock. If you die in 1923, six thousand (6,000) shares of preferred stock and nine thousand (9,000) shares of common stock. If you die in 1924, seven thousand (7,000) shares of preferred stock and ten thousand five hundred (10,500) shares of common stock. If you die in 1925, eight thousand five hundred (8,500) shares of preferred stock and twelve thousand seven hundred fifty (12,750) shares of common stock. If you die in 1926, ten thousand (10,000) shares of preferred stock and fifteen thousand (15,000) shares of common stock. The right and option to purchase stocks as above described in event the annual1371 net profits of the Corporation average Twelve Million Dollars ($12,000,000) shall fully accrue and apply in event said net profits average Ten Million Dollars ($10,000,000), excepting that in such case only five-sixths (5/6) of the number of shares specified may be purchased. If by reason of unforeseen difficulties such as fire, riots, war, etc., the net profits as hereinbefore defined are less than an average of Ten Million Dollars ($10,000,000) per annum from January 1, 1922, to and including the year of your death, the Corporation agrees to consider the circumstances and make some reasonable adjustment of the matter with your executor, administrator, personal representatives or assigns, which adjustment is to be accepted without question if it be approved by a majority of all the Directors of the Corporation. The right and option to purchase stock under the provisions of this paragraph may be exercised at one time or from time to time within a year and a half after your death. (e) You shall have the right to transfer, assign, or otherwise dispose of all or any part of your right and option to purchase stock as herein provided either before or after such right or option1372 shall have accrued. Your acceptance in writing at the foot hereof shall constitute this letter a contract between us. The execution of the foregoing contract and the purchase of the shares of stock by the corporation as provided therein were authorized by a resolution adopted by the executive committee at a special meeting held June 16, 1922. Pursuant to the agreement, the Studebaker Corporation purchased in the open market 10,000 shares of its preferred stock at a cost of $1,112,858.81 and 15,000 shares of its common stock at a cost of $1,840,212, which it deposited with Goldman, Sachs & Company. Since its organization, the Studebaker Corporation had always had in operation one or more plans for the payment of a bonus based upon profits to certain of its officers and employees. In 1920 and 1921 the petitioner's total compensation, including salary and 152 bonus, amounted to $256,276.40 and $342,963.17, respectively. In 1922 the petitioner received a bonus of $282,636.85 based on the 1921 profits. His regular salary was not in excess of $100,000 in either of those years. The net earnings of the Studebaker Corporation for the years 1911 to 1926, inclusive, 1373 before deductions for Federal income taxes, were as follows: 1911$2,153,555.6319122,780,927.0019132,275,244.1119144,901,799.0119159,201,548.9619168,704,680.6719174,359,417.0219184,817,612.74191911,283,463.051920$12,130,807.24192112,532,296.69192220,043,956.98192320,307,804.77192415,388,591.78192518,537,762.83192614,487,501.91Total163,906,970.29The Studebaker Corporation closed its books quarterly. Its first quarterly statement for 1922 showed net income, before deduction for taxes, of $4,575,836.69. The second quarterly statements showed income, before deduction for taxes, of $12,686,763.07. A close approximation of the corporation's earnings for the entire year 1922 might have been made in June, 1922, at the time the above contract was executed. The outlook at that time was favorable for a continuation of the profits shown for the first half of the year. During 1922 the Studebaker Corporation declared a 25 per cent stock dividend on its common stock, paying to Goldman, Sachs & Company the dividend on the shares held in escrow by it. On November 13, 1922, the petitioner executed a written1374 assignment to his wife, Annie Lyell Erskine, in the following form: KNOW ALL MEN BY THESE PRESENTS that in consideration of love and affection, I have given and assigned and I hereby do give and assign to my wife, Annie Lyell Erskine, the option or right which may accrue on or after December 31, 1922, by reason of the profits of The Studebaker Corporation for the year 1922, as ascertained by the audit for said year, under the provisions of subdivision (b) of paragraph 3 of a contract between me and The Studebaker Corporation dated June 27, 1922, to purchase from The Studebaker Corporation on or before January 1, 1927, Two Thousand five hundred (2500) shares of its seven (7%) per cent cumulative preferred stock and Three thousand seven hundred fifty (3750) shares of its common stock with the accumulated dividends thereon in excess of Seven ( $7) Dollars per share, upon paying therefor the sum of Twenty-five ( $25) Dollars per share plus accrued dividends for the seven (7%) per cent cumulative preferred stock and Ten ( $10) Dollars per share plus accrued dividends for the common stock, as provided in such contract. The corporation's earnings in 1922 being in excess of $15,000,000, 1375 the petitioner's wife in 1923 exercised the rights assigned to her by the 153 petitioner to acquire the shares of stock, paying to Goldman, Sachs & Company $100,000 and receiving 2,500 shares of the preferred stock and 3,750 shares of the common stock. She received also 937 1/2 additional shares of common stock representing the stock dividend declared in 1922. On November 1, 1923, the petitioner made a similar assignment to his wife of his rights to acquire the preferred stock only, based on the corporation's earnings for 1923, which she exercised in February, 1924, paying to Goldman, Sachs & Company $62,500 and receiving 2,500 shares of the preferred stock. The rights to purchase the common stock accruing on account of the 1923 profits were not assigned by the petitioner. The petitioner had always regarded his wife as an equal partner in his business. At the time of the above assignments she had an independent estate comparable to that of the petitioner. The payments made by her in acquiring the shares of stock under the assignments were out of her own separate funds. During 1924 the Studebaker Corporation changed its capital structure, issuing for each share1376 of common stock then outstanding 2 1/2 shares of the new common stock of no par value. The 14,062 1/2 shares of the common stock then held in escrow by Goldman, Sachs & Company were exchanged for 35,156 1/4 shares of the new stock. In February, 1924, the petitioner paid to Goldman, Sachs & Company $37,500 and received 4,687 1/2 shares of the common stock. The petitioner sold some of this stock in the same year and reported in his income-tax return a gain measured by the difference between its cost to him and the selling price. In 1925 and 1926, the petitioner exercised the rights with respect to the acquisition of both the common and the preferred stock accruing on account of the profits for 1924 and 1925, the profits for each of those years being in excess of $15,000,000. In each of the years 1925 and 1926, he paid to Goldman, Sachs & Company $100,000 and received 11,718 3/4 shares of common stock and 2,500 shares of preferred stock. During the years 1923 to 1926, inclusive, the Studebaker Corporation declared and paid cash dividends on its common stock, of which the following amounts in excess of 7 per cent were received by the petitioner and his wife along with the shares1377 of common stock acquired from Goldman, Sachs & Commpany as aforesaid: Received byYearAmountAnnie Lyell Erskine1923$8,562.50Albert Russel Erskine192431,875.00Do192552,499.50Do192687,770.31154 In their income-tax returns the petitioner and his wife reported the above amounts as dividends subject only to the surtax. Neither the petitioner nor his wife reported any income on account of the receipt of the shares of stock acquired by them under the agreement of June 27, 1922. The Studebaker Corporation in its income-tax returns for the calendar years 1923 to 1926, inclusive, deducted as compensation paid to the petitioner, $690,562.50 in 1923, $697,000 in 1924, $697,500 in 1925, and $738,268.31 in 1926. In his determination of the deficiencies herein, the respondent has added to the petitioner's reported income as compensation or bonuses received from the Studebaker Corporation, $698,742.18 in 1923, $677,382.80 in 1924, $748,729.97 in 1925, and $979,176.56 in 1926. The amounts named represent the difference between the value of the rights to buy the shares of stock of the Studebaker Corporation acquired by the petitioner under1378 the agreement of June 27, 1922, plus the accrued dividends thereon, and the amounts which the petitioner or his wife paid upon receipt of the shares of stock. OPINION. SMITH: The petitioner's contentions in these proceedings, as stated in his brief, are as follows: (1) That no income [other than the $100,000 salary reported] was realized by him, except upon the sale of the stock. (2) Alternatively, if petitioner realized any income as compensation prior to the sale of the stock it was realized in the year 1922 when the contract was received to the extent of its then value (not less than $800,000.00) and that any subsequent appreciation in value would be a capital gain realizable upon sale. (3) Alternatively, if income was realized upon the purchase of the stock, petitioner's assignee, his wife, realized the income on the purchase of the preferred and common stock applicable to 1922 operations and the purchase of the preferred stock applicable to 1923 operations. (4) The dividends in excess of 7 per cent declared on the shares of common stock held in escrow by the bankers, which inured to the benefit of your petitioner tioner and his wife under said contract, should1379 be taxable to your petitioner and/or his wife only at surtax rates as dividends and not also at the normal rates as determined by the respondent. It seems to us that the controlling question in these issues is whether the agreement of June 27, 1922, is to be regarded essentially as a contract of employment or whether it is, at least in part, a contract of purchase and sale. In other words, did the value of the rights to buy the shares of stock of the Studebaker Corporation in excess of the price required to be paid for them each year upon the terms and conditions named in the agreement represent compensation for services actually rendered? If so, then such compensation 155 to whatever extent it represents realized income is taxable to the petitioner in the years of its receipt, notwithstanding his assignments of all or a part of it to his wife in 1922 and 1923. . The agreement itself, which appears in full above, bears all of the essential characteristics of an ordinary employment contract. The petitioner was to serve as president of the corporation, or in some position of equal dignity, for a period of between four and1380 five years, beginning January 1, 1922, and was to receive a fixed annual salary of $100,000 and further consideration in the form of rights to acquire certain shares of stock of the corporation at an advantageous price, contingent upon the corporation's profits. It is well established by the evidence, and the petitioner does not deny, that the rights to acquire the shares of stock at the prices named in the agreement were of great value. The contention is made, however, that the predominant motive of the corporation in entering into the agreement was to have the petitioner become a substantial stockholder in the corporation, and that the rights to acquire the shares of stock were offered for that purpose and not as compensation for the petitioner's services. This was the burden of the testimony of Frederick S. Fish, chairman of the board of directors and the controlling figure in the corporation at that time. We have no reason to doubt that one of the purposes of the corporation in entering into the agreement was to have the petitioner become a large stockholder, nor do we question the wisdom of the plan adopted for carrying out that purpose. However, we do not understand1381 that this answers our question. What we must determine is whether and to what extent what was received by the petitioner under the agreement is taxable to him as compensation. It is well to observe that the purpose of the corporation to have the petitioner become a substantial stockholder might have been carried out just as effectively by other plans which would have left no doubt as to the petitioner's tax liability upon the receipt of the shares of stock. For instance, the agreement might have provided that the petitioner should receive for his services the fixed yearly salary of $100,000 and the right to a certain number of shares of stock of the corporation to be determined upon the basis of the earnings. Or, it might have provided that the petitioner should receive only the right to shares of stock for his services. In either case the rights would be taxable to the petitioner as compensation in the year when received by him, if reporting on a cash basis, to the extent of their fair market value at that time. ; 1382 ; ; ; ; Charles156 ; ; ; ; . The final results were the same as if the petitioner had received only the rights to the shares of stock for each year's services, since he was required to pay back to the corporation the exact amount of his cash salary already received in exchange for the shares of stock to which he was entitled in each year. We are convinced from a study of the instrument itself and the circumstances disclosed by the evidence that the agreement must be considered primarily as a contract of employment. It superseded a prior employment agreement under which the petitioner had received a total compensation of $256,276.40 in 1920, $342,963.17 in 1921, and $382,636.85 in 1922, although his regular salary was not in excess of $100,000 in either year. 1383 These amounts represented the regular annual salary and bonuses computed on the prior year's profits. With the prospect favorable for a continuation of the corporation's large profits the petitioner might reasonably have expected to receive, under the prior employment agreement, compensation of at least $300,000 or $400,000 a year. In the new agreement the corporation sought to reward the petitioner on account of "the very satisfactory and gratifying condition of the Corporation due in large measure to your able administration." This purpose certainly would not have been served by reducing the petitioner's compensation to one-third or one-fourth of that received under the prior agreement. Yet, that is the result if we eliminate from the petitioner's compensation under the new agreement his rights with respect to the acquisition of the shares of stock. The contract does not expressly limit the petitioner's total compensation to $100,000 a year. It merely provides for a fixed yearly salary of that amount. The rights to acquire the shares of stock, contingent upon profits, may reasonably be considered as taking the place of the cash bonus which was paid under the priod contract. 1384 We see no basis for construing that portion of the agreement relating to the petitioner's rights to acquire the shares of stock separately as a contract of purchase and sale. In the first place, the petitioner was not obligated to purchase the stock, but might do so at his own option, contingent upon the corporation's profits. The only true consideration for which the petitioner was obligated was his promise to serve the corporation for the period covered by the agreement. This consideration undoubtedly extended to all of the provisions of the contract. The petitioner's promise to pay at his own option $10 and $25 per share, respectively, for the common and preferred shares that had a ready market value of many times those 157 amounts would hardly constitute a fair or adequate consideration to support a contract of purchase and sale. The officers and directors of the corporation had no lawful right to make a gift to the petitioner of any part of the value of the shares of stock, or to "sell" them to the petitioner at a price known to be considerably less than their cost or market value. We must assume that the officers and directors did not act unlawfully. 1385 . We are aware that the agreement refers to the petitioner's rights to acquire the shares of stock as the "option to buy and receive," but we must look to the things done rather than to the language employed, to the substance rather than the form. . As said in : The use of the word "sale" in a contract does not necessarily conclusively determine its character. Its meaning may be qualified and the word deprived of its ordinary force by other provisions of the agreement. * * In that case the court reversed the Board's decision () in which the Board denied the taxpayer, the employer corporation, the right to deduct as a business expense the market value of certain shares of its stock allegedly paid to its employees as compensation. The court further said: * * * It is evident that petitioner intended in good faith to give bonuses in stock to valued employees as additional compensation and there was no intention to make an outright sale of stock to them. The Board was wrong1386 in holding the transactions to be sales. In , the court said: If, under the facts stated, we are bound by the plain meaning of the language employed in the resolution referred to in the statement of facts, then of course the transactions in controversy should be considered as sales, for that is what the resolution termed them, and pursuant thereto there was an exchange of stock for money. But in all relations of life it oftentimes happens that the thing done speaks so audibly that equity is prevented from hearing the language of the parties, and will classify the act by its real name rather than by the name which the interested parties have given it. In such instances the substance of the transaction will control the form, and the Board therefore was warranted in considering both form and substance in arriving at its conclusion. ; . That taxing statutes cannot be intentionally circumvented by anticipatory arrangements and contracts is settled by the principle laid down in1387 . * * * In liquidation of corporations it is quite proper and usual to take up the certificates of stock upon making the final distribution of assets. Such a transaction, however, is not to be regarded primarily as a sale of stock, although it has some such characteristics. It is more than a sale; it is primarily a liquidating distribution, and the sale, if it be such, is but an incident to the transaction. * * * That 158 the Studebaker Corporation regarded the entire agreement as an employment contract is indicated by the fact that in its income-tax returns for the years 1923, 1924, 1925, and 1926 it deducted as compensation paid to the petitioner not only the yearly salary of $100,000, but also amounts representing approximately the value of the shares of stock acquired by the petitioner under the agreement in each year less $100,000, the amount paid for them by the petitioner or his assignee. The petitioner himself, as president of the corporation, signed the returns. He testified that he knew at that time that the corporation had deducted the cost of the shares of stock, but did not know that the deductions were classified1388 as compensation paid to him. The fact that the corporation in its returns treated the transfers of the shares of stock to the petitioner as payments for compensation is, of course, not determinative of the petitioner's tax liability, but unquestionably it does show that the corporation put a different construction upon the agreement from that contended for by the petitioner. In , the court said: * * * It needs neither argument nor citation of authority to establish the proposition that the directors were without authority to give away the corporate assets, and that for them to make to several of their members and other persons a gift of a large sum of money from the corporate assets would be neither "wise" nor "proper," and would amount to an illegal misapplication of corporate funds. We must assume that the directors did not intend such a flagrant violation of their trust. , 77 C.C.A. 315; ; 1389 . It is no answer to this position to say that the stockholders ratified the gift by accepting the offer of $75 per share after notice that the distribution was to be made, for we are dealing with the interpretation of the resolutions, not with the validity of the action taken under them. And that this interpretation was the one intended is shown by the subsequent action of the corporation in claiming the disbursements made under the resolution as salary deductions from gross income. The agreement here placed no restriction whatever upon the sale of the stock by the petitioner. On the day of its receipt in each year the petitioner might have sold all of the shares of stock in the open market at prices commensurate with the amounts which the respondent has included in the petitioner's income. It was entirely optional with the petitioner whether he should keep the shares of stock or should immediately convert them into cash. Since there was admittedly a readily realizable market value for the stock this was tantamount to an option to receive either the shares of stock or the equivalent, that1390 is, the differential in value, in cash. It has been recognized that under some conditions rights to purchase shares of stock may constitute taxable income. In , the petitioner and other stockholders of a District of 159 Columbia bank sold their shares of stock in the bank, receiving for each share $400 cash and the right to subscribe for four shares of other stock in a newly organized trust company at $100 a share. The new stock had a value of $220 a share. We said: * * The right of each Bank stockholder to purchase four shares of the Trust Company's stock at $100 a share was a part of the consideration which the Trust Company agreed to pay for the Bank's stock, and the value of that right should be considered in measuring the profit realized by the Bank stockholders to the same extent as if it had been cash. The amount received by the Bank stockholders for their stock was, therefore, $400 a share, plus the value of the right to subscribe for four shares of the Trust Company's stock at par. Under the provisions of the contract and under all of the evidence submitted, the Board is of the opinion that the fair market price1391 or value of the right received by each Bank stockholder to subscribe to the Trust Company's stock at par was $120 a share. The result therefore is that the price received by each Bank stockholder for each share of Bank stock sold was $400, plus $480, the value of the right to subscribe for four shares of the Trust Company's stock, or $880 a share. This amount, less the cost or March 1, 1913, value of the Bank stock, which is not in dispute, is the proper measure of the profit per share of the Bank stock to each of these taxpayers. , involving the identical facts, the taxpayers being other parties to the same transaction, was decided upon authority of the Saul case. The latter case was appealed and was affirmed by the Court of Appeals of the District of Columbia in . The court in its opinion said: It appears by competent and convincing evidence that at the time of this transaction the stock of the American Security & Trust Company possessed a fair market value $220of a share. In practical effect therefore the owner of a share of stock in the Home Savings Bank received $400 in1392 cash for each share of stock transferred by him, and became entitled to convert the $400 thus received into four shares of the stock of the American Security & Trust Company, having at the time an aggregate fair market value of $880. The modus operandi thus pursued was induced by certain restrictions prescribed by the laws relating to corporations in the District of Columbia. However, it was manifestly contemplated by the contract that the vendor of each share of stock would avail himself of the right to secure, in payment thereof, the stipulated shares of stock in the other corporation having a value of $880, instead of resting satisfied with $400 in cash. * * * Appellants contend that the subscription right was not transferable, and therefore had no market value. We do not agree with this view, for it does not appear that the right, when matured, was not transferable, and in any event it was a property right which permitted the holder of each share of stock to buy for $100 a security having a present market value of $220. It may be noted that the appellants in fact availed themselves of this right, and that it was a substantial part of the consideration which induced them1393 to part with their original holdings. * * The 160 appellants contend that the subscription right cannot represent any taxable income until a sale is made of the stock purchased under its terms. It is argued that, until a sale is made, the value of the stock thus secured cannot be definitely ascertained, nor determination made of the loss or profit resulting therefrom. We think, however, that the question is one of present value, and the price realized on actual sales made in the usual and customary manner is admissible to fix such value. See , involving the same transaction as this, but with other stockholders as parties. We can see no difference in principle between those cases and the instant case. There, the rights to subscribe for the shares of stock at less than value were received in consideration for the sale of other stock. Here, the rights to subscribe for the stock at less than value were received in consideration for services performed. The question of the taxability of the rights to receive the shares of stock is substantially the same. 1394 The instant case is distinguishable from those in which it has been held that no taxable gain results from the bona fide purchase of shares of stock at a bargain price, ; ; ; , or from the purchase by an officer or employees, under a general corporate plan, of shares of stock of a corporation at par or for less than market value, . In , one of the cases relied upon by the petitioner, the court siad: The plan involved in this case does not present any question of bonus or profit sharing as such terms are used in income tax matters. The corporation offered an opportunity to its employees, in order to arouse their interest in the welfare of the company and to increase their efficiency as workers therein, to become participants in its prosperity by purchasing its common capital stock and by paying the full par value thereof out of their own1395 money. There was no gift of the stock and there was no distribution of it as a bonus. The right or privilege conferred upon such employees was substantially the same as corporate transactions whereby stockholders are permitted to subscribe at par for stock which is worth more than par in the market. Such transactions result in no taxable income to the purchasing stockholders until they shall have sold their stock and actually realized a profit thereon. . I see no reason for discriminating between stockholders of a corporation who are thus permitted to purchase stock at par and employees of a corporation who are permitted to do the same thing. * * * * * It is incorrect to state that the plaintiff received his stock as part of a profit-sharing plan in the nature of compensation for service rendered as an employee of long standing, because under the terms of the arrangement plaintiff could have paid the full amount of the purchase price the day after he made his subscription and could have taken his stock at that time and 161 could have left the employ of the company. Under such1396 circumstances, it cannot be said that the stock is in reality compensation for future services, or that any value of the stock in excess of the amount paid for it was additional compensation. The facts in the instant case are materially different. The agreement under which the petitioner received his rights was no part of a general corporate plan. It included no other officer or employee. There is ample evidence, too, that the petitioner's rights to acquire the stock were "in the nature of compensation for services rendered" or a "bonus." The petitioner here could not have bought his shares of stock until he had performed the services required of him. He assumed no risk in the possible event of a subsequent decline in the market value of the shares below the price named in the agreement because he was under no obligation to purchase them. The petitioner also relies upon In that case, the Circuit Court of Appeals for the Fifth Circuit, affirming the lower court, held that a transaction through which certain shares of stock were purchased at a price considerably less than their market value resulted in no taxable gain1397 to the purchasers, since the transaction was a "purchase in good faith." The court said: Conceding that compensation for personal services may be paid in property, instead of in money, and that income taxes may be assessed on the value of the property, we agree with the District Court that the transaction here in question was a purchase in good faith. In such case no taxable income would be derived until the disposal of the stock, except, of course, that arising from dividends. ; . The facts permitting, we would unhesitatingly apply that principle in the instant case but, as we have said, we can not regard the substance of the transactions here merely as a purchase and sale. This does not imply, as the petitioner argues it must, that the transaction was a fraudulent and unlawful attempt to evade taxes or even that it was an attempt lawfully to avoid the taxes. We are not confronted with these alternatives in the matters before us. Our question is whether the transaction was in substance and effect1398 a plan to compensate the petitioner for his services, or a bona fide purchase and sale. Cf. ; ; . There is not the slightest evidence of the latter except as found in the bare words of the agreement. We doubt that a further discussion of the numerous cases cited by the parties in support of their contentions with respect to this issue would prove helpful. It suffices to say that we do not regard 162 any of them as controlling here. Our determination that the entire value derived by the petitioner under the agreement of June 27, 1922, represented compensation for services rendered to the Studebaker Corporation is necessarily based upon the facts disclosed by the evidence in this case. See ; . The petitioner's alternative contention that the income, if any, received by him as compensation under the agreement was realized in 1922 when the agreement was entered into, or when the contract was received by him, 1399 to the extent of its then value of not less than $800,000, must also be denied. While the contract may have had the assignable value claimed for it by the petitioner at the time of its receipt, this value does not in any sense represent realized income to the petitioner in that year. It could not be determined definitely until the end of each year and until the profits had been computed just what amount of stock the petitioner would be entitled to buy under the agreement. With exceptions not here material, the petitioner was not entitled to buy any of the stock until he had performed the services required of him. The construction of the agreement as a contract for services to be performed by the petitioner seems in itself a complete denial of the contention that the income resulting therefrom was realized in the year of the execution of the contract rather than in the years of its performance. The statute clearly provides that the "gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid * * * shall be included in the gross income for the taxable year in which received by the taxpayer." See section1400 213(a), Revenue Acts of 1921, 1924, and 1926. A similar question was considered by the Board in . The petitioners in that case were contending that the amounts received by them in subsequent years in performance of certain contracts entered into prior to 1913 were taxable to them only to the extent of the excess of such amounts over the March 1, 1913, value of the contracts. The Board, in denying the contention, siad: * * Petitioners, on March 1, 1913, not only had no right to demand any specific sum, but had no right to make any demand under the contracts. What, if anything, they were to receive depended entirely on what the future might hold. Payment, when and if made, was to be not only for services rendered by the partnership prior to March 1, 1913, but covered as well services to be rendered by the petitioners after that date. They were to continue to perform certain duties until such time as the timber would be sold and it was impossible at March 1, 1913, to tell when that would be. Regardless of whether the contracts had an ascertainable value at the basic date, the question of law presented has been decided adversely1401 to petitioner's claim in a number of cases. * * [Citing , 163 certiorari denied, ; ; , affirming ; ; and . See also ; ; ; affd., . We are also of the opinion that the respondent was correct in allocating to the years 1923, 1924, 1925, and 1926 the additional compensation or bonus received in those years based upon the profits of the business in the preceding years 1922 to 1925, respectively. The contract of June 27, 1922, provided that the petitioner should "have the right and option to buy and receive, at any time after the completion of the annual audit for any and each such year and prior to January 1, 1927," the additional shares1402 which were acquired. The audit for 1922 was not completed until sometime in 1923, shortly after which the compensation shares were acquired by the petitioner or his assignee. The same is true for the subsequent years. The amount of the bonus of additional compensation received each year was the value of the rights to acquire the additional shares with accrued dividends. The respondent has computed this value as the difference between the market value of the shares with accrued dividends over the price which the petitioner was required to pay therefor. No evidence was offered that the value of the rights was otherwise. As we have already indicated, we are of the opinion that the issue relative to the petitioner's assignments to his wife in 1922 and 1923 of his rights to acquire certain of the shares of stock, such rights representing compensation for services to be performed, is controlled by the decision of the Supreme Court in The petitioner seeks to distinguish the instant case largely upon the grounds that the assignments here were of the option to purchase the shares of stock and not, as in the Earl case, of future earnings1403 from services to be performed. This distinction is, of course, predicated upon the petitioner's earlier contention, which we have decided adversely. At the time of the assignments here the petitioner had no clear option to purchase any of the shares of stock. His rights to acquire the stock depended entirely upon the contingency of the corporation's earnings and the continuation of his services. The option itself at its maturity represented compensation for services. As we understand the Earl case, it holds that future income from personal services can not be assigned to another so that it will not be taxable first to the assignor who earns it. Citing the sections of the Revenue Act of 1918 corresponding to those of the later acts applicable to the years here involved, the court said: 164 * * * There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skilfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction1404 can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew. In his supplemental brief the petitioner cites . In that case the taxpayer in 1917 assigned to his wife his interest in a certain contract under which he was to receive from a corporation one-third of the profits from a patented article invented by him. The court, in holding that the income from such contract in the years 1917 to 1921, inclusive, was taxable to the assignee, pointed out that the assignment was of a "property right presently existing" and not "of future earnings of the assignor arising out of his future services, as in the Earl and Luce cases." There is nothing in the court's opinion in the Earl case to indicate that any different conclusion would have been reached if the assignment there had been of the assignor's interest in an employment contract under which he was to receive compensation for personal services. 1405 , and , also cited by the petitioner, are distinguishable upon the same grounds as If we are correct in our conclusion that the value of the rights measured by the excess value of the shares of stock acquired by the petitioner or his assignee in each year under the agreement represented compensation for services, then, under the rule in the Earl case, we think that such compensation must be taxed to the petitioner as his own income, regardless of the assignments to his wife. See also Burnet v. Leininger, 285 U.S.; 136; ; . The remaining issue is whether the dividends in excess of 7 per cent declared on the common stock held by the escrow agent and received by the petitioner of his wife along with such shares of stock in 1923, 1924, 1925, and 1926, are taxable to the petitioner as dividends at the surtax rate only, or as ordinary income at both the surtax and normal rates. We can see1406 no reason for treating the accrued dividends, which under the terms of the agreement went to the petitioner along with the shares of stock, in any different manner from the rights to buy the shares of stock themselves, that is, as compensation for services. The petitioner was not a stockholder in respect of the escrow stock until it was received by him. The dividends declared thereon during 165 the escrow period were therefore not the petitioner's dividends. It was not known at the time of the declaration of the dividends whether the petitioner would ever receive the stock or the dividends. In , we held under similar facts that certain amounts representing dividends declared on shares of stock held in escrow for payment to an employee as compensation for services under a five-year employment contract were taxable to the petitioner as compensation. We are of the opinion that the amounts of the dividends received by the petitioner in each of the years as shown above are taxable to the petitioner as ordinary income and not as dividends. It appears from the deficiency notices that the respondent has added to the petitioner's1407 income as compensation received in each year the difference between the amount of cash which the petitioner paid in acquiring the shares of stock and the fair market value of the stock received at that time, plus the accrued cash dividends in excess of 7 per cent which were turned over to the petitioner or his wife with the shares of stock. For illustration, the deficiency notice covering the year 1926 shows an addition to salary of $979,176.56, with the explanation that "this amount is the excess value of compensation stock over amount paid by you, plus amount measured by excess of dividends of 7% paid into escrow account before ownership of the stock." We assume that the respondent has correctly determined the fair market value of the shares of stock in question and of the rights to buy such shares upon the dates of their receipt by the petitioner and his wife, since no objection on this point has been raised. The amount thus determined in respect of the rights to buy the shares of stock received in each year plus the cash salary of $100,000 is the amount of compensation taxable to the petitioner in each of the years 1923 to 1926, inclusive. Reviewed by the Board. Judgment1408 will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620902/	St. Albert's American-Polish Citizens and Social Club of the Shenango Valley v. Commissioner.St. Albert's American-Polish Citizens & Social Club v. CommissionerDocket No. 49583.United States Tax CourtT.C. Memo 1955-60; 1955 Tax Ct. Memo LEXIS 277; 14 T.C.M. (CCH) 196; T.C.M. (RIA) 55060; March 15, 1955Phillip O. North, Esq., for the respondent. MURDOCK Memorandum Findings of Fact and Opinion MURDOCK, Judge: The Commissioner determined deficiencies in income tax of $859.93 for 1946, $460.81 for 1947, and $719.87 for 1949. The only issue for decision is whether the petitioner is exempt from tax under section 101(9) as a social club. The stipulations of facts are adopted as the findings of facts. [Findings of Fact] The petitioner was incorporated under the so-called non-profit corporation law of Pennsylvania in 1935. Its purposes as set forth in its charter were as follows: "The Corporation is formed for the purpose of educating its members in the principles of our Government by means of discussions and lectures to be delivered by prominent persons versed in political governmental sciences not for278 profit but conducive to the literary, educational and mental development and the social entertainment of its members. The corporation is not interested in fostering or furthering any political propaganda, nor is it intended that it shall aid and further the doctrines of any certain political party. The corporation is also formed for the purpose of acquiring and maintaining club rooms to be used in furthering the purposes of the association." The record does not show what, if anything, the Club did to carry out those purposes except as is hereafter indicated. The Club issued no stock but had active and social members during the taxable years. Social members enjoyed all of the privileges of active members except that they did not hold office or vote. Only members and their guests in their company were permitted to use the Club. The number of active members increased from 145 in 1946 to 193 in 1949, and the number of social members from 50 in 1946 to 109 in 1949. The annual dues for active members were $1.50 and those for social members were $1. The Club regularly maintained a system, during the taxable years, of paying sick benefits to active members who paid 50" per month therefor279 in addition to their regular dues and had been active members for at least six months. Further requirements for receiving sick benefits were: Being current in the payment of all dues for at least thirty days preceding the sickness or disability; experiencing sickness or disability which would incapacitate him for his regular work for a period in excess of one week; and giving written notice and certification of illness to the petitioner. Sick benefits were limited to $8 per week and not more than 13 payments in any 12-month period. The number eligible for sick benefits during the taxable years increased from 18 in 1946 to 28 in 1949. The constitution and by-laws of the petitioner contained the following provisions during the taxable years: "ARTICLE VI "BENEFITS * * "Section 2. "In case of death of an active class member in good standing of at least one year, with dues paid up to date, the organization shall pay to his legal heirs the sum of $25.00. The sum of this benefit can only be changed subject to majority vote of members present at annual meeting." The following table shows the amounts of dues collected and sick and death benefits paid in the four-year period. 280 DuesBenefitsSickActiveSocialbenefitmembersmembersTotalSickDeath1946$102.50$145.00$ 50.00$297.50$ 40.00$50.001947123.50122.0054.00299.50360.001948132.00112.2591.00335.25120.001949167.5063.00109.00339.5080.0025.00The petitioner had only one bank account and receipts from all sources were deposited in that account and all disbursements were made from that account. The gross revenue of the petitioner for the taxable years varied from $16,673.54 in 1946 to $17,891.79 in 1949, at least $13,000 of which in each year came from the sale of liquor, beverages and food and at least $2,000 of which represented income from machines operated by the insertion of a coin. The total deductions of the petitioner for the taxable years varied from $12,578.64 in 1946 to $14,463.85 in 1949. The principal expenditures were for cost of goods sold, salaries, taxes, and "other deductions." The net income of the petitioner was $4,094.90 for 1946, $2,194.34 for 1947, and $3,427.94 for 1949. [Opinion] Section 101(9) exempts from taxation "clubs organized and operated exclusively for281 pleasure, recreation, and other non-profitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder." The taxpayer must show that it comes within those exempting provisions. Section 29.101(9)-1 of Regulations 111 states that the above provisions apply to social and recreation clubs which are supported by membership fees, dues and assessments, but if a club engages in traffic or other activities for profit it is not organized and operated exclusively for pleasure, recreation or social purposes. The sick and death benefit activities of the petitioner were not isolated transactions or an adjunct of some other important purpose of the Club. They had no particular relation to the other purposes of the Club. They could not be classified as an operation for pleasure, recreation or social purposes and therefore the petitioner was not operating exclusively for such purposes. Cf. Jockey Club, 30 B.T.A. 670">30 B.T.A. 670, affd. 76 Fed. (2d) 597; West Side Tennis Club, 39 B.T.A. 149">39 B.T.A. 149, affd. 111 Fed. (2d) 6, certiorari denied 311 U.S. 674">311 U.S. 674; Chattanooga Automobile Club, 12 T.C. 967">12 T.C. 967, affd. 282 182 Fed. (2d) 551; Keystone Automobile Club, 12 T.C. 1038">12 T.C. 1038, affd. 181 Fed. (2d) 402; section 101(3). Furthermore, a part of the net earnings of the petitioner, those paid out in sick and death benefits, inured to the benefit of members. Cf. Aviation Club of Utah, 7 T.C. 377">7 T.C. 377, affd. 162 Fed. (2d) 984, certiorari denied 332 U.S. 837">332 U.S. 837. It is immaterial that special dues were collected from those who were entitled to sick benefits since those dues are a part of the net earnings of the Club. Jockey Club, supra. That provision was apparently unsound from an actuarial standpoint. The total amount paid out in sick benefits from 1946 through 1949 exceeded the sick benefits dues collected for the same period, and for 1947 the sick benefit dues collected were $123.50 while the sick benefits paid out were $360, or almost three times the dues collected. Actually, both the sick benefits and the death benefits were paid from the general funds of the petitioner and thus came from its earnings, which earnings include all dues. The petitioner is not exempt under section 101(9). Decision will be entered for the respondent. *283	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620904/	Estate of Maurice Falk, Deceased, Leon Falk, Jr., and Eugene B. Strassburger, Surviving Executors, Petitioner, v. Commissioner of Internal Revenue, RespondentFalk v. CommissionerDocket No. 30311United States Tax Court18 T.C. 699; 1952 U.S. Tax Ct. LEXIS 149; June 30, 1952, Promulgated 149 Decision will be entered under Rule 50. 1. Decedent, who died in 1946, transferred securities to his second wife in 1934 pursuant to an agreement entered into in 1930. In agreeing to the transfer, the decedent was motivated by a desire to give his wife a wedding present and not by a desire to bar her rights as widow in his estate. Held, the transfer of the securities was not made in contemplation of death within the meaning of section 811 (c), Internal Revenue Code.2. On April 23, 1946, the petitioner, by authority of the trustees of a charitable organization, the residuary legatee under the decedent's will, agreed to purchase annuity contracts for the benefit of the decedent's widow in consideration of her election to take under the decedent's will. Pursuant to the agreement, the petitioner purchased refund annuity contracts in which the charitable organization was irrevocably named as beneficiary. The cost of the refund type annuity contracts was $ 83,425.29 in excess of the cost of no refund type annuity contracts which would have provided the widow with the same benefits but which would not have refunded the excess of the premiums received over the amounts paid to150 the widow. Held, the sum of $ 83,425.29 is includible in the residuary bequest to the charitable organization. Louis Caplan, Esq., for the petitioner.Fortescue W. Hopkins, Esq., for the respondent. 151 Arundell, Judge. Raum, J., concurs only in the result on the second issue. ARUNDELL699 The respondent has determined a deficiency of $ 121,404.15 in the petitioner's estate tax liability. The deficiency results from including 700 in the decedent's gross estate securities which the respondent contends were transferred in contemplation of death, and from reducing by $ 206,819.26 the sum claimed as a deductible charitable bequest.All stipulated facts are found as stipulated.FINDINGS OF FACT.The decedent, Maurice Falk, died testate on March 18, 1946. His last will and testament, dated July 24, 1944, was duly probated.The decedent named as the executors of his estate Leon Falk, Jr., I. A. Simon, and Eugene B. Strassburger, all of whom duly qualified as such on April 1, 1946. I. A. Simon, one of the executors, died on November 17, 1949. Leon Falk, Jr., and Eugene B. Strassburger are the surviving and acting executors.The estate tax return for the decedent's estate was filed on June 18, 1947, with the collector of internal revenue for the twenty-third district of Pennsylvania at Pittsburgh, Pennsylvania, and showed an estate tax liability in the amount of $ 152 768,955.35, which was paid on June 18, 1947.The decedent and his brother, Leon Falk, were engaged in business together in Pittsburgh for a number of years. They originally began in the nonferrous metals business. They also participated in founding other industries and amassed considerable fortunes.The decedent and Leon Falk retired from active conduct of their nonferrous metals business in 1923 or 1924. At that time they became very active in philanthropic endeavors in the city of Pittsburgh where their fortune had been made. They were generous donors to community philanthropies. Their gifts included $ 500,000 for the creation of the Falk Clinic at the University of Pittsburgh, $ 100,000 to the Montefiore Hospital, $ 100,000 to the Young Men's and Young Women's Hebrew Associations and current contributions on a community basis. They also took an active part in the work of those charities and were trustees and officers in most of them.After the disposal of their metal business, the decedent and Leon Falk (who died in 1928) continued as directors in most of the companies which they had helped to found. Those were large corporations having capital surpluses ranging from $ 17,000,000153 to $ 100,000,000. The decedent was also director of a bank in Pittsburgh which had deposits in 1930 totaling approximately $ 75,000,000, and of an insurance company, which at that time had approximately $ 250,000,000 of life insurance outstanding.The decedent continued to serve as a director of those corporations until his death in 1946. He was very active as a director and attended board meetings regularly. He attended meetings of the board of 701 directors of a bank in Pittsburgh almost daily and served on the loan committee.Prior to 1929, the decedent had been married to Laura Falk, who died in December 1928. Shortly after the death of Laura Falk, the decedent announced that he was going to create a charitable foundation in her memory. At the time that that announcement was made, the value of the securities that the decedent announced he would transfer to the Foundation to create it was approximately $ 10,000,000.The Foundation, which is known as "The Maurice and Laura Falk Foundation" (hereinafter referred to as the Foundation) was created by deed of trust dated December 14, 1929, and the designated securities were transferred to it.Prior to the creation of the 154 Foundation and up to the time of its establishment, the decedent discussed his aims and ideas with respect to the Foundation with his nephew, Leon Falk, Jr., who became the chairman of the board of the Foundation, and with Eugene B. Strassburger who was one of the first trustees and is now the secretary of the Foundation. After the creation of the Foundation and continuing to the time of his death, the decedent took an active interest in the work of the Foundation. He attended all of its meetings when he was in Pittsburgh.The decedent was a very cheerful, energetic, and mentally alert man, who was keenly interested in business, philanthropy, and politics at all times until his death. He was very active, in excellent health, and played golf regularly up to the time of his death.Shortly after September 20, 1930, the decedent, then a widower, was married to Selma K. Wertheimer (hereinafter referred to as Selma), then a widow. At the time of his marriage, Maurice Falk was 64 years of age and had no children or other descendants. Selma was then 62 years of age and had one child, a married daughter, and no other descendants. At the time of the marriage, Maurice Falk and Selma were155 in good health.Selma's family and the family of her first husband, Morris Wertheimer, who died early in 1929, and the Falk family had been very close friends for many years. The decedent and Selma were friends since childhood and were classmates at school. The decedent looked forward to his second marriage.Selma was a very independent person and stated, immediately prior to her contemplated marriage with the decedent, that she was anxious that her financial affairs be kept separate from those of the decedent. She said that she did not want any of the decedent's property and that she wanted to make it clear that she was not going to benefit financially by her marriage. Her insistence in this matter was the only difficulty in the way of the proposed marriage. She knew, and 702 was motivated by the fact, that the Foundation had been created in memory of the decedent's first wife and that the decedent intended that most of his fortune should go to this Foundation.As the result of the insistence of Selma that the financial affairs of the decedent and herself be kept separate and apart and that she should not benefit financially by the marriage, the decedent and Selma on September156 20, 1930, shortly prior to their marriage, entered into a written antenuptial agreement. It was recited in the antenuptial agreement that each of the parties was independent financially and that it was the intention of both that, notwithstanding the contemplated marriage, neither should have any share or interest in the property, estate, or income of the other.In the antenuptial agreement, the decedent agreed that if the proposed marriage were entered into he would, on or before December 31, 1931, transfer and deliver to Selma 1,000 shares of the capital stock of National Steel Corporation or other stock or securities of equal value acceptable to Selma. Further, in the agreement the decedent released Selma and any property or estate she then had or might thereafter have from any right of curtesy or other right or claim to which the decedent might be entitled as husband of Selma, and Selma released the decedent and any property or estate he then had or might thereafter have from any and all dower or other right or claim to which Selma might be entitled as the wife of the decedent.At the time of the execution of the antenuptial agreement and of the marriage, the decedent had a net157 worth in excess of $ 1,750,000. His net income from dividends, interest, and salary for the year 1930 was in excess of $ 125,000 before deduction for income taxes. At the time of the execution of the antenuptial agreement and of the marriage, Selma had a life interest in a trust created under the will of her deceased husband, Morris S. Wertheimer, of which Selma and the Fidelity Trust Company of Pittsburgh were trustees. Selma was entitled to all of the income of the trust estate during her life and, in addition to such net income, the trustees were directed to pay Selma so much of the principal of the trust fund as she might request from time to time, even to the exhaustion of the trust fund. At the time of the execution of the antenuptial agreement and of the marriage, the market value of the corpus of the trust fund was $ 209,485.26. The income from the trust fund for the year 1930 was $ 15,230.94 before deduction for income taxes.On September 20, 1930, when the antenuptial agreement was executed the market value of shares of the capital stock of National Steel Corporation was $ 53 per share. On December 31, 1931, the date specified in the antenuptial agreement for the delivery158 of the 1,000 shares of stock of National Steel Corporation to Selma, the market 703 value of the stock was $ 22 per share. On or about November 26, 1934, in fulfillment of the terms of the antenuptial agreement, the decedent transferred to Selma 1,000 shares of the capital stock of National Steel Corporation, which at that time had a market value of $ 45,500.During the period 1929-1930, the decedent did not have sufficient cash to fulfill some of his commitments to charity. He did not wish to sell securities to meet those commitments and from time to time he borrowed money.Following their wedding, the decedent and Selma went on a wedding trip. They made frequent trips after their marriage. They travelled to Florida every year and spent much of their time in Hollywood, in that state. Their marriage proved to be a very happy one and they were very devoted to each other.Originally the decedent and Selma stayed in resort hotels in Florida. In 1937 the decedent built his own home in Hollywood and he and Selma spent their winters there from 1937 until the time of his death in 1946. The decedent led a very active life in Florida. He took part in swimming and fishing, including159 strenuous deep-sea fishing.The decedent died in Florida from uremic poisoning. His last illness lasted a few days.The income of the decedent from dividends and interest for the year 1945 (the year before his death) was $ 114,708.99 before deduction for income taxes. The income of Selma for the year 1945 was $ 13,639.05 before deduction for income taxes.At the time of his death, the decedent had a net worth of approximately $ 3,300,000.At the time of the decedent's death, the market value of 1,000 shares of stock of National Steel Corporation was $ 82,250.The transfer by the decedent on or about November 26, 1934, to Selma of 1,000 shares of the capital stock of National Steel Corporation in fulfillment of the terms of the antenuptial agreement was not a transfer made by the decedent in contemplation of death.The decedent devised and bequeathed his entire residuary estate (subject to the payment of two small annuities which are not here involved) to the trustees of the Foundation for the uses and purposes set forth in the written agreement between the decedent and the trustees dated December 14, 1929, by which the Foundation was created. The decedent made no provision in his160 will for Selma.On April 23, 1946, the petitioner, by authority of the trustees of the Foundation, as residuary legatee under the decedent's will, entered into a written agreement with Selma, under which the petitioner agreed that if Selma would execute and deliver to the petitioner at that time her written irrevocable election as widow to take under the decedent's will, in order that the administration and distribution 704 of the estate might be expedited, the petitioner, in consideration thereof, would pay to her, or upon her order, the sum of $ 5,000, plus an amount sufficient to purchase refund annuity contracts, which would provide for payment to her of $ 1,250 per month for life and for payment to the Foundation of the refundable portions of the original premiums remaining unused at the time of her death, and would also transfer and deliver to her the decedent's 1941 Cadillac automobile and all of the decedent's household goods and jewelry.Pursuant to the terms of the agreement, Selma delivered to the petitioner on April 23, 1946, her written election to take under the decedent's will and relinquished all her right as widow to take against the will.Pursuant to the terms161 of the agreement, the petitioner, on or about April 24, 1946, purchased for $ 223,455.88 refund annuity contracts which provided for the payment of quarterly annuities in the amount of $ 3,750 to Selma for the remainder of her lifetime. In the refund annuity contracts, the Foundation was irrevocably named as beneficiary to receive upon the death of Selma the full balance of the purchase price of the contracts in excess of the total amounts paid to her during her lifetime. The amount payable to the Foundation if Selma had died on April 24, 1946, was $ 223,455.88 and decreased quarterly by $ 3,750. If Selma had lived until 15 years after April 24, 1946, the payments to her would have exceeded the purchase price of the contracts and no refund payments would have been available to the Foundation. The same insurance companies would have charged $ 140,030.59 for the contracts on a no-refund basis, under which none of the unused portion of the purchase price would be refunded by the insurance companies upon the death of Selma.In pursuance of the agreement, the petitioner paid to Selma the sum of $ 5,000 in cash and delivered to her the decedent's 1941 Cadillac automobile and the decedent's162 household goods and jewelry which had a total value of $ 4,450 at the time of the decedent's death.All of the bequests contained in the decedent's will except the residuary bequest to the Foundation have been paid in full.Selma died on November 4, 1947. There had been paid to her during her lifetime under the refund annuity contracts the total sum of $ 22,426.50. At the time of her death there remained unused and refundable to the Foundation from the purchase price of the contracts a balance of $ 201,029.38 which was paid to the trustees of the Foundation.Selma was born on February 12, 1868, and was 78 years of age at the time of the purchase of the above recited annuity contracts. On March 18, 1946, as well as on April 24, 1946, the life expectancy of Selma under the Actuaries' or Combined Experience Table of Mortality, as extended, was 5.42 years.705 The annuity contracts provided that the quarterly payments of $ 3,750 to Selma should begin on or about August 1, 1946, and should terminate with the last quarterly payment immediately preceding her death.The value as of April 24, 1946, of the interest of the Foundation, as irrevocable beneficiary, in the refund annuity163 contracts, on the basis of the Actuaries' Combined Experience Table of Mortality, as extended, and on the basis of 4 per cent compound interest, was $ 122,797.On April 24, 1946, the difference between the aggregate amount of premiums which the insurance companies charged for the refund annuity contracts, namely, $ 223,455.88, and the amount which the same insurance companies would have charged for the contracts on a no-refund basis, namely, $ 140,030.59, was $ 83,425.29.The Foundation is now and at all times since its creation on December 14, 1929, has been a trust created and operated exclusively for charitable, scientific and educational purposes and all gifts and bequests to it are used exclusively for such purposes. No substantial part of the activities of the Foundation is carrying on propaganda, or otherwise attempting to influence legislation.OPINION.The first question before us is whether the decedent's transfer of securities in 1934, approximately 12 years before his death in 1946, was a transfer made in contemplation of death within the meaning of section 811 (c), 1 Internal Revenue Code. The question is one of fact. Allen v. Trust Co. of Georgia, 326 U.S. 630.164 165 The transfer in 1934 of 1,000 shares of stock in the National Steel Corporation was in fulfillment of a promise incorporated in an antenuptial agreement executed in 1930 by petitioner and his prospective bride. At the time of the agreement, the decedent was a widower, 64 years of age, and was looking forward to his second marriage to a widow who had been a classmate and a life-long friend.706 At all times until shortly before his death in 1946, the decedent was a cheerful, energetic, and mentally alert individual, who enjoyed excellent health, played golf regularly, made frequent trips, especially to Florida where he built a home in 1937, and participated in such sports as swimming and deep-sea fishing. In addition, he served as a director of several companies, attended board meetings regularly, participated in philanthropic activities and took an active interest in the Maurice and Laura Falk Foundation, referred to herein as the Foundation, a charitable organization he created in 1929.Finally, it is significant that in 1930 the transferred property had a value of only $ 53,000, a relatively small sum when contrasted to the sum of $ 1,750,000 which represented the decedent's166 financial worth at that time, after having transferred to the Foundation securities worth approximately $ 10,000,000 in 1928.In view of these and other facts set forth in our findings, we think it is clear that neither the thought of death nor the desire to avoid death taxes was the impelling cause for the 1930 agreement to transfer the securities.The respondent nevertheless refers to the fact that the decedent's promise to transfer the securities was incorporated in the antenuptial agreement in which the decedent and Selma relinquished their interests as spouse in each other's property and concludes that the promise to transfer the securities was part consideration for Selma's release of her statutory interests as widow. From this premise, the respondent argues that the motive for the transfer was therefore a motive associated with death, which brings the transfer within the purview of section 811 (c) of the Code, citing In re Kroger's Estate, 145 F. 2d 901, certiorari denied 324 U.S. 866">324 U.S. 866.In In re Kroger's Estate, the Court of Appeals for the Sixth Circuit held that there was substantial evidence to support our finding167 that the transfers in question were for the purpose of barring the decedent's prospective wife from her statutory rights should she survive him, and were made in contemplation of death. In 1928 shortly prior to his marriage, the decedent had transferred in trust a material part of his property, consisting of Treasury notes with a face value of $ 12,000,000, and directed that the income be paid to the decedent for life, remainder to his children and grandchildren. The decedent's decision to transfer the property in trust was reached after several discussions with his children concerning his contemplated marriage to a woman many years his junior. The record left no doubt that the transfer was motivated by the decedent's desire to have the property pass at his death to his children rather than to the woman he planned to marry.The decision reached in In re Kroger's Estate, supra, is not determinative here. In the instant case, the decedent-transferor was childless 707 and only a few years older than his prospective wife. Contrary to respondent's contention, the antenuptial agreement was initiated by Selma, not the decedent. Being a very independent168 person and possessed of sufficient financial wealth in her own right, Selma was anxious to have her financial affairs kept separate from those of the decedent so that she would not profit financially from the marriage and it would not be marred by any financial conflict. She was life beneficiary of a trust with a corpus valued at approximately $ 209,000 in 1930 which yielded an income of approximately $ 15,000 in that year, and she had only one descendant, a married daughter.In entering into the antenuptial agreement, the decedent was motivated by a desire to satisfy the wishes of Selma and not by a motive associated with death such as an intent to bar her rights as his widow. The decedent's nephew, who was a close friend as well as business associate, testified that the decedent intended the transfer to be a wedding gift and we think the evidence establishes this intent. At the time of the agreement, the securities had a value of $ 53,000, which represented only about three per cent of the decedent's financial worth. It was not an improbable sum to be given to a wife as a wedding gift by a husband then worth approximately $ 1,750,000, after having transferred to a Foundation169 created in memory of his first wife securities worth in 1928 approximately $ 10,000,000 and, moreover, who gave to public charities sums far in excess of $ 53,000.After considering the entire record, it is our view that the decedent's transfer of the securities was not impelled by the thought of death, the desire to avoid death taxes, or the desire to bar Selma's statutory rights as widow, and was not a transfer in contemplation of death within the meaning of section 811 (c) of the Code.The second question, the amount to be deducted from the decedent's gross estate as a charitable bequest under section 812 (d), Internal Revenue Code, arises from the following facts: The decedent bequeathed his entire residuary estate to the Maurice and Laura Falk Foundation, an admittedly charitable organization within the meaning of section 812 (d), and left no legacy or bequest to his widow Selma.On April 23, 1946, about five weeks after the decedent's death, his executors, by authority of the trustees of the Foundation, as residuary legatee under the decedent's will, agreed to pay Selma a sum sufficient to purchase annuity contracts which would provide for payment to her of $ 1,250 per month170 for life. The agreement to pay this sum, plus other property with a value of $ 9,450, which is not in dispute, was in consideration of her election 2 to take under the decedent's will and thus expedite the distribution of the estate.708 The agreement provided for the purchase of "refund" annuity contracts which would refund to the Foundation the premiums unused, if any, at the time of Selma's death. The "refund" annuity contracts cost $ 223,455.88 which was $ 83,425.29 in excess of the cost of "no refund" annuity contracts that would have provided Selma with the same benefits but which would not have refunded the unused premiums.The purchase of the "refund" annuity contracts at the additional cost of $ 83,425.29 was solely for the benefit of the Foundation. The agreement provided that the Foundation would be irrevocably designated as beneficiary. 171 The refund payable to the Foundation on April 24, 1946, was $ 223,455.88 (the total cost) and decreased quarterly by $ 3,750, the amount of the quarterly payments to the annuitant, Selma. If Selma lived for 15 years after April 24, 1946, no refund would have been available to the Foundation.With these facts before us, the problem is to determine the value of the deductible residuary bequest to the Foundation. The petitioner argues that there should be included in the residuary estate the sum of $ 122,797 which allegedly represents the value of the Foundation's "remainder" interest in the refund annuity contracts or, alternatively, the sum of $ 83,425.29 which represents the cost of that interest. The respondent contends the interest is not deductible as a charitable bequest and gives as his reasons principles applicable to bequests of contingent remainders to charity. He argues, inter alia, that the value of the interests in the annuity contracts is not ascertainable and also that the possibility that Selma would live for 15 years after April 24, 1946, with the result that the Foundation would not receive any refund, was not too remote to be negligible. See Merchants National Bank of Boston v. Commissioner, 320 U.S. 256">320 U.S. 256;172 Humes v. United States, 276 U.S. 487">276 U.S. 487; Newton Trust Co. v. Commissioner, 160 F.2d 175">160 F. 2d 175; Boston Safe Deposit & Trust Co., et al., Executors, 30 B. T. A. 679, appeal dismissed December 10, 1934; Regs. 105, sec. 81.44 and 81.46. In short, the parties center the issue on the valuation of the Foundation's interest in the refund annuity contracts.However, as we understand the plan of the Federal estate tax, the problem does not require a valuation of the interest in the refund annuity contracts, as urged by the parties. The interest was not bequeathed by the decedent and was not part of his residuary estate but was instead an asset purchased by the Foundation 3 with funds received from the decedent's residuary estate. 4173 709 The problem is to value the residuary estate, and that can best be done here by looking to what remained in the residuary estate after deducting from the gross estate all debts, expenses, legacies and bequests (other than the residuary bequest), including the property transferred to Selma in consideration of her election to take under the will. The issue, therefore, centers on what remained in the residuary estate after taking into account the sum expended for the benefit of Selma by reason of the agreement executed on April 23, 1946.The starting point is the rule applied in In re Sage's Estate, 122 F. 2d 480, certiorari denied 314 U.S. 699">314 U.S. 699. See also Thompson's Estate v. Commissioner, 123 F. 2d 816; Regs. 105, sec. 81.44. The Court of Appeals for the Third Circuit held, in In re Sage's Estate, supra, that a sum received by a widow from a charitable residuary legatee under a compromise agreement to procure her abandonment of a will contest was to be treated as a specific bequest contained in the will, and was not includible in the residuary estate174 as part of the deductible charitable bequest. The court stated that "what the widow received in settlement of the will contest, she took by 'inheritance' within the meaning of the Revenue Acts" and that what the charity received by inheritance was the residuary estate that remained after the payment to the widow.The rule of the Sage and Thompson cases is that there is subtracted from the decedent's gross estate as a testamentary bequest the value of what the widow received in settlement of her will contest. She is deemed to have taken the property by "inheritance" within the meaning of the Internal Revenue Code. Applying that rule here, Selma received by "inheritance" certain property valued at $ 9,450 and an annuity valued at $ 140,030.59. Those sums are part of the total sum subtracted from the decedent's gross estate in determining the value of the residuary estate.The additional sum of $ 83,425.29, representing the cost of the refund provision contained in the annuity contracts, was not expended for the benefit of Selma and did not represent anything of value to her. Selma's estate was not the beneficiary of the provision and Selma had no voice in designating the175 beneficiary. Her agreement with the executors specifically provided that the Foundation was to be irrevocably designated as beneficiary. Perhaps the trustees of the Foundation decided to purchase the refund provisions for the benefit of the Foundation after concluding that it offered a good opportunity for financial gain.Therefore, the sum of $ 83,425.29, although expended in connection with the purchase of annuity contracts for the benefit of Selma, was not part of the consideration received by her and is not included in 710 the total subtracted from the decedent's gross estate. Instead, that sum remained a part of the gross estate and passed into the residuary estate. The sum would have passed either in the form of cash or securities to the Foundation as residuary legatee if it had not purchased the refund provisions and had instead purchased the no-refund type of annuity contracts.It should be noted at this point that the Foundation received the interest in the refund provisions by purchase, not by inheritance. What it received by inheritance was cash or other property with a value of $ 83,425.29 which in turn was used by it to purchase the refund provisions. Since176 the interest in the refund provisions was received by purchase and not by inheritance, the value of the interest or the fact that it was subject to divestment by a nonremote contingency is not relevant in determining the value of the charitable bequest that is deducted from the decedent's gross estate.We, therefore, hold that the deductible charitable bequest includes the sum of $ 83,425.29 which, pursuant to the authorization of the trustees of the Foundation, was used to purchase the refund provisions in the annuity contracts.Decision will be entered under Rule 50. Footnotes1. Section 811 (c), as effective for the taxable years and prior to amendment in succeeding years, reads as follows:SEC. 811. GROSS ESTATE.The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States --* * * (c) Transfers in Contemplation of, or Taking Effect at, Death. -- (1) General Rule. -- To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise -- * * (A) in contemplation of his death. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this subchapter; * *↩2. See Pennsylvania Wills Act of 1917, Act of 1917, June 7, P. L. 403, sec. 23 (a) and (b), as amended. (20 Purd. Stat. Ann., Appendix, secs. 261, 262, pp. 451, 452.)↩3. The executors of the estate executed the agreement with the widow Selma and purchased the annuity contracts but they acted pursuant to authorization by the trustees of the Foundation as residuary legatee.↩4. One of the contentions of the petitioner was that the refund interest in the annuity contracts represented an investment of assets of the decedent's estate for the account of the Foundation.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620905/	BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS EXECUTOR OF THE LAST WILL AND TESTAMENT AND OF THE ESTATE OF WILLIAM JOHN MCGOWAN, DECEASED, AND AS TRUSTEE UNDER TRUST AGREEMENT EXECUTED BY WILLIAM JOHN MCGOWAN IN HIS LIFETIME, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bank of Am. Nat'l Trust & Sav. Ass'n v. CommissionerDocket No. 100967.United States Board of Tax Appeals43 B.T.A. 695; 1941 BTA LEXIS 1468; February 19, 1941, Promulgated 1468 A resident of California in 1929 transferred in trust a tract of land separately owned by him and a tract for which his wife paid one-ninth of the cost with separate funds and both signed a note for the remainder, secured by mortgage on both tracts. The trust was revocable, and the husband was entitled to the use and income of the land for life. In 1931 he and his wife signed an agreement that all their property be held in community. The mortgage note was paid with income from the tracts. Held, the value of the husband's gross estate uopn his death in 1937 includes (1) one-half of the value of the personalty of both spouses; (2) the full value of the separately owned tract, transferred in trust; (3) four-ninths of the value of the second tract, transferred in trust. R. H. Hudson, Esq., for the petitioner. Arthur L. Murray, Esq., for the respondent. STERNHAGEN 696 The Commissioner determined a deficiency of $11,129.29 in estate tax. He denied the petitioner's contention that property was held in community, and that only one-half of its value should be included in gross estate. Petitioner contends, in the alternative, that part of1469 the property was the separate estate of decedent's wife. FINDINGS OF FACT. The Bank of America National Trust & Savings Association, successor of the Bank of Italy National Trust & Savings Association, is a national banking association, with branch office at Watsonville, California. It is executor of the estate of William John McGowan, deceased, and trustee of a trust created by him on January 4, 1929. McGowan died testate on August 13, 1937, leaving his wife and seven children surviving. In 1888 McGowan, then single, purchased 93.14 acres of land, called the home place, in Monterey County, California, subject to a mortgage, for $10,500. He was married in 1889. On October 30, 1920, he purchased 131.57 acres of land, called the Trafton tract, in Monterey County, California, for $45,000. The mortgage debt on the home place, owed to the Watsonville Savings Bank, remained unpaid. To raise funds to meet his combined obligations of $55,500, he and his wife executed a note for $50,500 in favor of the Watsonville Savings Bank, secured by a mortgage on both tracts, and his wife paid $5,000, received by her as part of a legacy from an uncle's estate. On February 21, 1921, his1470 wife received an additional $2,500 of the legacy, and applied it to payment of the mortgage note. Five thousand dollars more was paid in 1924 from crop profits. On January 21, 1926, a new note was executed, secured by deed of trust, for $43,000, the unpaid remainder of the old note, in favor of the Bank of Italy. On January 4, 1929, McGowan executed a trust instrument. It is stipulated that at that time the home place was his separate property. He conveyed both tracts to the Bank of Italy as trustee, reserving to himself for life the right to possession and income, and directing that upon his death the trustee enter into possession with full power to manage, lease, and encumber; to collect the income and pay expenses; to pay the net income to his wife for life, if surviving; to pay it for five years after the death of the survivor of himself and wife in equal shares to his children or the issue of a deceased child per stirpes; and thereafter to distribute corpus equally among them. He reserved the right to change or amend any of the trust provisions, to revoke the trust in whole or in part "by writtin declaration or agreement, subscribed by the trustor and by the trustee", 1471 and to withdraw "any part or all of the trust estate." "If not revoked by the Trustor during his lifetime the Trust shall become irrevocable upon his death * ". By an attached declaration his wife 697 waived any "community or other interest" which she might have in the real property transferred in trust. On January 4, 1929, McGowan also made a will, by which he devised and bequeathed all his property to his wife, if surviving; otherwise to his seven children in equal shares. On April 13, 1929, McGowan leased the Trafton tract and the home place (exclusive of a dwelling house and a few acres) to the H. P. Garin Co., for a period of five years. A new lease was made with the lessee's receiver in 1931; and with the lessee in 1932. At the end of each lease McGowan's wife signed the statement: "I * * * hereby consent to and join in the making of said lease * * ." In October 1937 the trustee bank leased the tracts to H. P. Garin, as receiver for the company. The rent for the year beginning in 1929 was $15,750, and for succeeding years ranged from $10,000 to $12,600. The two tracts contained about 210 acres of tillable soil, of which 123 were in the Trafton tract. This1472 tract contained a well, was under irrigation, and most of the income from the two tracts was attributable to it. The home place had no well. On the $43,000 note a principal payment of $8,000 was made in May 1929 with profits on crops of the mortgaged properties, and additional payments aggregating $20,000 were made before 1931 with rents from the properties, thus reducing the unpaid principal to $15,000. On December 16, 1930, McGowan and his wife gave the bank a new note for $15,000, secured by a mortgage on the two tracts. Before 1936 $10,000 was paid on it. On December 29, 1931, McGowan and his wife signed a declaration: That all the property, wherever situate, of whatsoever kind or nature now owned or held by the parties hereto, or either of them, and standing of record in the name of either of the parties hereto, or otherwise, is the community property of the marriage of the parties hereto as community property is defined by the laws of the State of California. Between May 1, 1934, and February 1, 1937, McGowan made loans to his children for which they gave him interest-bearing promissory notes. When the loans were made his only income was rents of the leased tracts. 1473 At the time of his death these loans aggregated $16,215.50; accrued interest on them, $654.78. On the estate tax return the executor reported the decedent's property at the time of death as follows: Accrued rentals on real property$4,562.50Shares of Watsonville Airport Co200.00Notes of children with accrued interest16,870.28Cash in bank4,482.50Household furniture and automobile185.00The home place57,000.00The Trafton tract79,550.00Total162,850.28698 He included one-half of this amount, or $81,425.14 in gross estate, and took deductions of $2,680.05, thereby arriving at a figure less than the $100,000 exemption, and reported no tax due. The Commissioner included in gross estate the full value of reported property, and determined a deficiency of $11,129.29 in estate tax. OPINION. STERNHAGEN: The Commissioner arrived at the deficiency by expanding the decedent's gross estate to include the entire value at the time of his death of the personalty, the home place, and the Trafton tract. The petitioner assails this and points to the community property agreement of December 29, 1931, to support the contention that all of1474 the property, real and personal, was the subject of this agreement and that only one-half thereof was properly in the gross estate. As to the personal property, there is no doubt that the community agreement of 1931 covered it and that only one-half the value thereof is properly within the gross estate. The community property agreement was valid and effective under California law, In re Sill's Estate,121 Cal. App. 202">121 Cal.App. 202; 9 Pac.(2d) 243; Yoakam v. Kingery,126 Cal. 30">126 Cal. 30; 58 Pac. 324; covered property previously as well as subsequently acquired by either spouse, In re Henderson's Estate,128 Cal. App. 397">128 Cal.App. 397; 17 Pac.(2d) 786; Roberts Land & Improvement Co. v. Dallas,124 Cal. App. 86">124 Cal.App. 86; 11 Pac.(2d) 1103; In re Wahlefeld's Estate,105 Cal. App. 770">105 Cal.App. 770; 288 Pac. 870; and is binding upon the Federal Government in the determination of the gross estate, United States v. Goodyear, 99 Fed.(2d) 523; 1475 Bank of America National Trust & Savings Association v. Rogan,33 Fed.Supp. 183. As shown by the findings, this personal property consisted of the five items aggregating $26,300.28. The home place was acquired by the decedent prior to his marriage, and it is stipulated by the parties that it was his separate property when it was transferred in trust in 1929. The trust was revocable and hence the home place is, by section 302(d) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1936 (see sec. 811(d), I.R.C.), within the gross estate to the extent of its entire value. Helvering v. City Bank Farmers Trust Co.,296 U.S. 85">296 U.S. 85. This must be held, irrespective of the later community property agreement of 1931. Having made the transfer by a revocable trust, the decedent could not avoid the inclusion of the entire value thereof in his gross estate by subsequently executing a community property agreement. This can be readily seen by supposing an outright gift of the home place in contemplation of death. In such case the property would have been included within the gross estate in its entirety, notwithstanding any 699 1476 subsequent agreement converting his separate property into community property. By the declaration of 1929, the Trafton tract was likewise transferred in trust, and by the same reasoning the decedent's interest must be included in his gross estate, notwithstanding the community agreement of 1931. The extent of such interest is to be determined. It depends upon the proportions of the investment in the tract which decedent, his wife, and the marital community contributed. In re Fellow's Estate,106 Cal. App. 681">106 Cal.App. 681; 289 Pac. 887. These proportions can not be determined with precision. As shown by the findings, the property was acquired in 1920 for a price of $45,000, of which the $5,000 paid in cash was contributed by the wife from her separate bequest. The remaining $40,000 was covered by a note given by both and secured by a mortgage on the combined home place and Trafton tract. Soon thereafter a payment of $2,500 was made on the note with money contributed by the wife from a separate bequest. Thereafter the remainder of the note was paid in several payments with money attributable to income from farming operations and rents of the combined properties. 1477 With some doubt, we think that the only part of the investment that can be clearly said to support a separate interest of the wife is the original $5,000 which she paid in the purchase of the Trafton tract. This was one-ninth of the entire purchase price of $45,000; the other eight-ninths was community property until the transfer in trust. The property transferred in trust by the decedent is one-half of this community estate, or four-ninths of the value of the Trafton tract. The other four-ninths is to be regarded as the remaining community property attributable to the wife and one-ninth is to be regarded as the wife's separate property. This apportionment, it must be admitted, is mathematically less than satisfactory, but it is as precise as the evidence permits. The rents and income which were used to discharge the note can not be identified as to their source between the home place and the Trafton tract; and since the home place is stipulated to have been the husband's separate property and by California law the income from separate property is itself separate property of the owner thereof, section 163, Deering's Civil Code of California; 1478 In re Dargie's Estate,179 Cal. 418">179 Cal. 418; 177 Pac. 165; Van Camp v. Van Camp,53 Cal. App. 17">53 Cal.App. 17; 199 Pac. 885, it would be a hopeless task to apportion among the husband, the wife, and the community the payments that were made of the purchase price before the 1931 agreement. Although the $2,500 payment by the wife in 1921 is specific, it is, since an approximation is necessary, fair to leave this item out of the account as a proper offset to the other uncertainties in the calculation. *700 To summarize, therefore, the decedent's gross estate is held to include (1) one-half the value of the five items of personal property which are held to be covered by the community agreement of 1931; (2) the entire value of the home place at the date of death; and (3) four-ninths of the value of the Trafton tract at the date of death. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620906/	PHILIP D. WILLIAMS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWilliams v. CommissionerDocket No. 21127-88United States Tax CourtT.C. Memo 1990-467; 1990 Tax Ct. Memo LEXIS 512; 60 T.C.M. (CCH) 627; T.C.M. (RIA) 90467; August 29, 1990, Filed 512 Decision will be entered under Rule 155. Matthew Yackshaw, for the petitioner. Ernest D. Defoy, for the respondent. JACOBS, Judge. JACOBSMEMORANDUM FINDINGS OF FACT AND OPINION Respondent determined deficiencies in petitioner's Federal income taxes for 1985 and 1986 in the amounts of $ 1,859 and $ 1,646, respectively. After concessions, the sole issue for decision concerns petitioner's entitlement to a claimed deduction for automobile expenses under section 162(a) 1 incurred in traveling to and from his home in Canton, Ohio and513 his job site in Shippingport, Pennsylvania. Resolution of this issue depends upon whether petitioner's employment in Shippingport during 1985 and 1986 was temporary or indefinite. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by this reference. Philip D. Williams (petitioner) resided in Canton, Ohio, when he filed his petition. At all material times, petitioner was a journeyman electrician; since 1981, he has been a member in good standing with the International Brotherhood of Electrical Workers Local Union No. 540 (Local 540) in Canton. Petitioner worked steadily as an electrician in the Canton area until the fall of 1985, when he was laid off. He was unable to obtain work in the Canton area following this514 layoff. Generally, electricians (such as petitioner) obtain employment through their union local. However, when employment cannot be secured through their own local, they are referred to other union locals. Thus, following petitioner's unsuccessful attempts to find work in the Canton area, Local 540 referred him to several different union locals in Northeastern Ohio and Pennsylvania. Petitioner finally secured employment with Sargent Electric Company (Sargent Electric) through Local 712 in Shippingport, Pennsylvania. Petitioner began employment with Sargent Electric on October 14, 1985, and was assigned to a temporary light and power crew during a portion of the construction of the Beaver Valley Power Station (Power Station), a nuclear power plant in Shippingport. Sargent Electric was one of the construction contractors for the nuclear plant. When petitioner began working at the Power Station, 95 to 97 percent of the construction work was completed; therefore, he expected his employment at the Power Station to be of brief duration. He was told by both his foreman and the area foreman that his work would most probably be completed in three months; and, if delays occurred, 515 his employment could continue for up to one year. Petitioner did not expect to continue working at the Power Station after construction was completed. However, due to delays in the project, petitioner's work was extended into 1987. During the time petitioner was employed by Sargent Electric in Shippingport, he resided in the Canton vicinity and lived in a rented house. He chose to remain in Canton because he had strong family and economic ties there and he believed his job in Shippingport would be of a short duration. He had purchased (for investment purposes) two houses in the Canton area in 1983 and 1985. In 1987 and 1988, he purchased three other investment properties in the Canton area. During the years in issue, petitioner drove 140 miles (round trip) to the Power Station from his residence in Canton each work day. Using the Standard Mileage Rate contained on Form 2106, petitioner claimed $ 5,735 as automobile expenses incurred in traveling to and from his home and the Power Station job site in Shippingport. Petitioner continued to seek work within the jurisdiction of his own Local 540 throughout the period of his employment in Shippingport. He contacted his local516 union administrator weekly by phone and attended its meetings each month to keep updated as to possible job opportunities in the Canton area. He also registered his availability for employment on the out-of-work list of Local 540. In June 1987, petitioner began working with Burden Electric Co. Inc. (Burden Electric), in Alliance, Ohio. At the time petitioner started work with Burden Electric, members of the light and power crew at the Power Station were still working on the project. Respondent determined that petitioner's job at the Power Station in Shippingport was indefinite, not temporary, and accordingly disallowed the automobile expenses claimed by petitioner on his 1985 and 1986 tax returns. OPINION This case involves the question of whether daily transportation expenses (not involving an overnight stay) are deductible. Section 162(a) allows a taxpayer to deduct his "ordinary and necessary" expenses incurred in the pursuit of a "trade or business." However, as a general rule, expenses related to transportation between a taxpayer's residence and place of business are nondeductible personal commuting expenses rather than deductible business expenses. Sec. 262; .517 But a deduction is allowable for a taxpayer's transportation expenses to a temporary, as opposed to an indefinite or permanent, job assignment. ; . Petitioner argues that he was working temporarily at the Power Plant in Shippingport. Respondent, on the other hand, contends that petitioner's employment at the Power Station for the years in issue was indefinite rather than temporary. For the reasons stated below, we agree with petitioner that his employment in Shippingport during 1985 and 1986 was temporary rather than indefinite. In general, employment is temporary if at its inception its termination within a short period of time can be foreseen. ; ; . Employment is indefinite if at its inception its termination within a fixed or reasonably short period of time cannot be foreseen. , affd. .518 The determination of whether employment is temporary or indefinite is a question of fact. . "No single element is determinative of the ultimate factual issue of temporariness, and there are no rules of thumb, durational or otherwise." . The facts in this case are similar to those in , where we allowed the taxpayer to deduct travel expenses while he worked on a temporary basis at a nuclear power plant approximately 142 miles away from his home. The taxpayer realistically expected his employment to last less than two years. During that time the taxpayer maintained contacts within his home area and attempted to obtain employment there. Here, petitioner accepted the job in Shippingport only after failing to find employment in the Canton area. He was employed specifically as a temporary construction electrician, and realistically expected his employment with Sargent Electric to continue for a short period of time since construction of the power plant was 95 to 97 percent completed when he began working519 there, and his superiors believed the work would be completed sometime in 1986. Petitioner's claimed tax home in Canton was his regular place of residence before, during, and after his temporary employment in Shippingport. He purchased and maintained rental properties in the Canton area during and after the years in question. He remained a member of Local 540 in Canton and continued to maintain business contacts with representatives of his local union during the course of his employment in Shippingport. Petitioner has satisfied his burden of proving that his employment with Sargent Electric in Shippingport, Pennsylvania, during 1985 and 1986 was temporary. Accordingly, his automobile expenses are deductible. To reflect the foregoing and concessions made by petitioner, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620907/	Homer H. and Ina Mae Marshman v. Commissioner.Marshman v. CommissionerDocket No. 61457.United States Tax CourtT.C. Memo 1958-174; 1958 Tax Ct. Memo LEXIS 52; 17 T.C.M. (CCH) 864; T.C.M. (RIA) 58174; September 19, 195852 William F. Snyder, Esq., for the petitioners. William O. Allen, Esq., for the respondent. MULRONEY Memorandum Findings of Fact and Opinion MULRONEY, Judge: The respondent determined deficiencies in the petitioners' income tax and addition to tax, as follows: Additionto Tax UnderYearDeficiencySec. 294(d)(2)1952$ 7,620.63195324,555.70$2,106.22The issue in this case is whether petitioner Ina Mae Marshman realized a longterm capital gain of $1,950 in 1952 and a long-term capital gain of $87,076.55 in 1953 upon the sale of 100 shares and 4,750 shares, respectively, of common stock of The Stouffer Corporation. Findings of Fact Some of the facts have been stipulated and they are so found. Pursuant to a stipulation of the parties, this case and Estate of Gordan A. Stouffer, Deceased, Mark A. Loofbourrow, Executor, Docket No. 63606, where tried on a single record. After the divorce of Gordon Stouffer and Ina Mae Stouffer in June of 1951, related in Docket No. 63606, Ina Mae married Homer H. Marshman and they reside in Cleveland Heights, Ohio. They filed their joint income tax returns for the years 1952 and 1953 with the53 district director of internal revenue at Cleveland, Ohio. This summary of the facts, related in more detail in Docket No. 63606, will suffice. In the divorce settlement and decree in 1951 in Ina Mae's divorce action against Gordon Stouffer, she received a relinquishment of Gordon's option, dated in 1937, to purchase her 20,000 shares of $2.50 common stock in The Stouffer Corporation. The option, reciting one dollar consideration, granted Gordon the right to purchase the stock for $40,000. During the years 1952 and 1953 Ina Mae sold some of the shares of $2.50 par value common stock of The Stouffer Corporation, which were in question in Docket No. 63606. In reporting these transactions in their income tax returns for the years 1952 and 1953, petitioners claimed an adjusted basis with respect to these shares of $20 a share. Opinion Respondent admits petitioners used the correct basis if we hold that Gordon realized gain in the sum of $359,999 in the divorce settlement when he relinquished his option to purchase the stock. We so held in Docket No. 63606, therefore, in accordance with the concession, the judgment will be in favor of petitioners. Decision will be entered under*54 Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620909/	E. B. FICKLEN TOBACCO CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.E. B. Ficklen Tobacco Co. v. CommissionerDocket No. 10440.United States Board of Tax Appeals10 B.T.A. 51; 1928 BTA LEXIS 4203; January 20, 1928, Promulgated 4203 Petitioner held entitled to computation of its profits taxes under section 328 of the Revenue Act of 1918. P. D. Hutchinson, Esq., for the petitioner. A. S. Lisenby, Esq., for the respondent. PHILLIPS51 Petitioner seeks the redetermination of a deficiency of $1,053.26, determined by the Commissioner, in income and profits tax for the fiscal year ended May 31, 1919. It alleges that the Commissioner erred by not finding abnormalities in net income and invested capital which would bring the petitioner within section 327 of the Revenue Act of 1918, and in not computing the excess-profits tax in accordance with section 328 of the Revenue Act of 1918. A further error alleged in the petition was waived at the hearing. FINDINGS OF FACT. Petitioner is a North Carolina corporation with its principal office at Greenville. It was incorporated in July, 1913. It acquired the assets of a business known as E. B. Ficklen Tobacco Co., paying therefor 52 $14,000. Upon organization 300 shares of its capital stock of the par value of $100 per share were issued as follows: E. B. Ficklen155 sharesL. N. Dibrell140 sharesA. M. Moseley5 shares4204 Prior to the taxable year involved, additional capital stock was sold as follows: Suhling & Co70 sharesJ. M. Edmunds & Co55 sharesE. B. Ferguson35 sharesDibrell Brothers Inc40 sharesPetitioner was engaged in buying and selling tobacco on commission, on its own account, and for the joint account of itself and others. Its sales during the fiscal year involved herein amounted to $1,970,999.32. Included in these sales were $1,062.604.83 to Dibrell Brothers and $289,190.68 to J. M. Edmunds Co., both of which organizations were holders of stock in the petitioner corporation. During the taxable year petitioner loaned $3,000 to New Bern Tobacco Co., which amount was repaid to it in that year. It received $9,700.53, which was one-third of the profits of that company, and such amount was included in computing its income. Petitioner and Suhling & Co., both being dealers in leaf tobacco, entered into a joint venture to purchase and resell tobacco. For this purpose petitioner issued its notes to the amount of $100,000, which were endorsed by E. B. Ficklen, E. B. Ferguson and Suhling & Co. Such notes were payable in 90 days and on the due dates thereof4205 like notes for $75,000 were issued. From this venture petitioner realized a profit of $6,183.30 within the taxable year. The business carried on by petitioner is seasonable in character, the active season being from about the middle of July in one year to the first of March of the next year. Between July 31, 1918, and September 12, 1918, petitioner issued its notes totaling $255,000, all of which were for 90 days. Such amount of $255,000 was the largest amount outstanding at any time during the year. As such notes became due, it issued other notes. The total of the notes so issued for the year was $490,000. All of such notes were endorsed individually by E. B. Ficklen and all bur one thereof were endorsed individually by E. B. Ferguson. On May 31, 1918, petitioner had cash on hand of $91,319.31, accounts receivable of $23,748.47, and accounts payable of $1,231.32. On May 31, 1919, its inventory of tobacco was $36,457.59. For the taxable year involved petitioner had a net taxable income of $100,350.54 and its statutory invested capital was $148,514.49. Of this income, $81,878.82 was from commissions earned. The Commissioner 53 computed its excess-profits tax4206 and war-profits tax as $51,509.32. E. B. Ficklen was the president of the petitioner and attended to buying, grading, and selling its tobacco. He enjoyed an excellent reputation in the business, gained through 35 years of experience. OPINION. PHILLIPS: Petitioner claims that during the taxable year there were abnormalities affecting both its capital and income which bring it within section 327 of the Revenue Act of 1918 and entitled it to a computation of its tax under section 328 of the statute. Several abnormalities are urged. Eighty per cent of the income was from commissions, representing a personal service in which invested capital played only a minor part. The invested capital was only a small part of the total capital used in the business. The money borrowed was secured only after the two officers, and in some cases others, had endorsed the notes individually, thereby risking a further part of their private resources in the business. Substantial profits were derived from joint ventures with others, operated solely on borrowed capital. The petitioner was not in existence in one or more of the prewar years and the profits credits have been computed without the4207 benefit of the income and invested capital of the prewar years. While no one of these standing alone might be sufficient to constitute an abnormality, we are of the opinion that the combination is such as to overcome any contention that the income was due to a high rate of profit on a normal invested capital and is such as to establish abnormalities affecting the income and capital of the petitioner. The deficiency will be redetermined under Rule 62(c) of the Board and decision entered accordingly.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620910/	BERNARD T. MEHR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentMehr v. CommissionerDocket No. 3313-77.United States Tax CourtT.C. Memo 1979-36; 1979 Tax Ct. Memo LEXIS 489; 38 T.C.M. (CCH) 142; T.C.M. (RIA) 79036; January 25, 1979, Filed 489 Held, respondent's motion for judgment on the pleadings, granted. Bernard T. Mehr, pro se. Gerald W. Leland, for the respondent. DRENNENMEMORANDUM OPINION DRENNEN, Judge: This case is before us on respondent's motion for judgment on the pleadings. On January 11, 1977, respondent mailed to petitioner a notice of deficiency determining deficiencies and additions to tax as follows: Addition to tax under YearDeficiencysec. 6651(a)sec. 6653(a)sec. 6654 11972 $ 293.02$ 73.26$ 14.65$ 2.8619733,549.92887.48177.5034.6519743,172.15793.04158.6130.9619752,352.52588.13117.6322.96Petitioner filed a petition on April 4, 1977; a copy of the notice of deficiency was not attached. See Rule 34(b)(8), Tax Court Rules of Practice and Procedure (hereinafter "rules"). The petition alleged that to attach the notice of deficiency would be waiving certain constitutional and civil rights. No errors in the notice of deficiency were alleged. As facts upon which petitioner relies, the petition alleged a. Petitioner filed lawful tax returns (attached) in accordance with his constitutional rights as redress 490 of grievances; (b) that issuance of a notice of deficiency forcing him into the position of petitioner to the Tax Court was in violation of due process of law. The petition also requested a trial by jury and counsel of his choice, and petitioner also offered to amend his returns for the years involved to the Commissioner's satisfaction provided that in doing so he was not waiving any of his constitutional rights. Attached to the petition were what purported to be tax returns for Bernard Mehr for each of the years 1972, 1973, 1974, and 1975 and were signed by him. The only dollar figure entered on each of the returns was on line 1, "under $ 740", with a footnote indicating it was expressed in constitutional dollars of gold and silver. The filer refused to answer any questions on the return on grounds of the Fifth and other constitutional amendments.All of these returns were stamped received by the Internal Revenue Service on April 7, 1976, and attached to each was an affidavit signed by Bernard Mehr dated April 7, 1976. Respondent filed an answer to this petition on May 11, 1977, denying most of the allegations or statements in the petition. A copy of the notice of deficiency was 491 attached which indicated that respondent had determined petitioner's income for each of the years 1972-75 by including therein income in specific amounts received from specific sources; i.e., the First District Association and the Department of Agriculture and loans forgiven by the Farmers Home Administration. On June 8, 1978, the case was noticed for trial on the St. Paul, Minn., calendar, as requested by petitioner, starting on September 18, 1978. On July 31, 1978, respondent filed a motion for judgment on the pleadings on the grounds that the petition did not assign any errors in respondent's determination of deficiency and did not allege any facts contesting the correctness of respondent's determination or upon which a determination of petitioner's tax liability could be made. Respondent simultaneously filed a motion to continue the trial of the case. On August 28, 1978, petitioner lodged with the Tax Court an amended petition which was ordered filed when the case was called from the trial calendar in St. Paul. This petition alleged as error in respondent's determination: "a. 492 That the assessment for the years in question is arbitrary, capricious and totally without foundation." The only facts on which petitioner relied were alleged to be (a) that respondent was barred by the statute of limitations for 1972 and 1973, (b) that for the years 1974 and 1975 the "binder [sic] of proof" lies with respondent and it is incumbent on him to commence any action for collection of tax, and (c) petitioner states on oath that he does not owe $ 12,269.34 as income tax for the years in question. Respondent filed an answer to the amended petition on October 10, 1978, in which he denied the allegation in the amended petition and also alleged as a defense to the statute of limitations for 1972 and 1973 that the alleged returns filed by petitioner were not statutory returns which would start the running of the statute of limitations for 1972 and 1973, and, in addition, the alleged returns for those years were not filed until April 7, 1976, so the notice of deficiency was timely for those years. When the case was called on September 19 and 20, 1978, at St. Paul for hearing on respondent's motions, respondent's motion to continue trial of the case was granted and respondent's 493 motion for judgment on the pleadings was taken under advisement. At the hearing on these motions, attended by petitioner pro se, the Court asked petitioner whether he had filed tax returns for the years involved prior to April 7, 1976, and he answered in the negative. The Court then advised petitioner that in its opinion his pleadings did not assign any errors or allege any facts upon which relief could be granted to him and that on the then state of the record it would have to grant respondent's motion for judgment on the pleadings, there being no facts in dispute and no reasons stated in the pleadings for finding error in respondent's determination of deficiencies. However, the Court also advised petitioner that it would hold the record open for 30 days for petitioner to file a second amended petition in compliance with the rules of the Court and setting forth assignments of error in respondent's determination and alleging facts upon which he relied to reflect what he believed to be his correct taxable income for the years involved and to support the assigned errors in respondent's determination.On October 23, 1978, petitioner filed an "Amended Petition" in which he alleged that 494 the burden was on respondent to prove the averments in the notice of deficiency and alleged as error: (a) That the assessment was arbitrary and capricious; (b) that petitioner did not earn the amount of income alleged in the notice of deficiency; and (c) that the amount of tax set out in the notice of deficiency is incorrect based on the above allegations. As facts upon which he relies, petitioner made the same allegations as made in his first amended petition: (a) That respondent is barred by the statute of limitations for 1972 and 1973; (b) that as to 1974 and 1975 respondent has the "binder [sic] of proof" and it is incumbent on him to commence any action for collection of tax; and (c) upon oath petitioner states that he does not owe $ 12,269.34 as income tax for the years in question.We must first decide the status of respondent's motion for judgment on the pleadings since it was filed before petitioner filed his amended petitions. The question is whether respondent's motion is applicable to the second set of pleadings or whether we must deny the motion on the ground that the pleadings to which it relates have been superseded. Our research reveals that the former course of action 495 is proper. Ulen Contracting Corp. v. Tri-County Electric Coop.,1 F.R.D. 284">1 F.R.D. 284 (W.D. Mich. 1940), holds that a motion for judgment on the pleadings under Rule 12(c), Federal Rules of Civil Procedure, must be disposed of upon an amended complaint even though it was filed subsequent to the motion. Inasmuch as Rule 120(a), Tax Court Rules of Practice and Procedure, is based upon the Federal rule relied upon in Ulen Contracting Corp. (see 60 T.C. 1126">60 T.C. 1126), we perceive no reason to proceed differently. See Rule 1(a), Tax Court Rules of Practice and Procedure.As explained in the note accompanying Rule 120(a), a motion for judgment on the pleadings " * * is appropriate only where the pleadings do not raise a genuine issue of material fact, but rather involve only issues of law. The motion is to be granted only if, on the admitted facts, the moving party is entitled to a decision." Here, it is clear that petitioner's general assignments of error without allegations of the underlying facts upon which he relies fail to raise genuine issues of material fact. Petitioner merely sets forth what he hopes will be the ultimate conclusions of the case. He alleges no facts to support his assignment 496 of error that respondent's determination was arbitrary and capricious and no facts to support his allegation that he did not earn the income set out in the notice of deficiency and did not owe $ 12,269.34 in income tax for the years in issue.With regard to what might be considered issues of law, it is firmly established that petitioner has the burden of proving error in respondent's determination of deficiencies in tax and additions to tax under sections 6651(a), 6653(a), and 6654 of the Code. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); West Virginia Steel Corporation v. Commissioner,34 T.C. 851">34 T.C. 851 (1960); Marcello v. Commissioner,380 F. 2d 499 (5th Cir. 1967); Reaver v. Commissioner,42 T.C. 72">42 T.C. 72 (1964). It is not incumbent on respondent to commence any action for collection of the tax at this stage of the proceedings. Respondent must comply with the requirements of section 6212 and send the taxpayer a notice of deficiency, and if the taxpayer files a timely petition in the Tax Court, respondent may not assess a deficiency until the decision of the Tax Court has become final. Sec. 6213. If the taxpayer does not file a petition with the Tax Court within the period prescribed, the respondent 497 shall assess the deficiency and it shall be paid upon notice and demand. Sec. 6213(c). Petitioner's allegation that respondent is barred from assessing and collecting deficiencies for 1972 and 1973 is not supported by the record. Petitioner has not alleged when his returns for those years were filed, which he must do to rely on the statute of limitations, see Lawrence v. Commissioner,3 B.T.A. 40">3 B.T.A. 40 (1925); Refiners Production Co. v. Commissioner,43 B.T.A. 481">43 B.T.A. 481 (1941), 2 and the record before us indicates that petitioner did not file returns for those years prior to April 7, 1976, so the notice of deficiency for those years was clearly timely. Sec. 6501(a). 3All of the constitutional arguments mentioned by petitioner in his pleadings, such as the Fifth Amendment, the right to trial by jury, due process of law, redress of grievances, and income being limited to that received *498 in gold or silver coins, have been found by this Court to be without merit in civil tax cases on many occasions.For a full discussion of these arguments, see Cupp v. Commissioner65 T.C.68 (1975), affd. 559 F. 2d 1207 (3d Cir. 1977). See also Swanson v. Commissioner,65 T.C. 1180">65 T.C. 1180 (1976). Since petitioner's pleadings raise no issues of law that would permit us to conclude that respondent's determinations in his notice of deficiency were incorrect, respondent's motion for judgment on the pleadings will be granted. 4An appropriate order will be entered.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise stated.↩2. See also Lockwell v. Commissioner,↩ a Memorandum Opinion of this Court dated Dec. 12, 1951. 3. We need not consider whether the returns petitioner filed were sufficient to start the running of the statute of limitations, but see Gajewski v. Commissioner,67 T.C. 181">67 T.C. 181 (1976), affd. 578 F. 2d 1383↩ (8th Cir. 1978).4. See Leatherman v. Commissioner,T.C. Memo 1975-41">T.C. Memo. 1975-41; Fales v. Commissioner,T.C. Memo. 1975-52↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620914/	DAVID M. GREEN AND JOAN GREEN, SAMUEL MORITZ AND TILLIE MORITZ, ESTATE OF BURTON S. BROOKS, DECEASED, ANITA C. BROOKS, EXECUTRIX AND ANITA C. BROOKS, MICHAEL MANDEL AND ANITA C. BROOKS MANDEL, HORACE J. WALDMAN AND EDITH K. WALDMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGreen v. CommissionerDocket No. 16616-83United States Tax CourtT.C. Memo 1989-436; 1989 Tax Ct. Memo LEXIS 435; 57 T.C.M. (CCH) 1333; T.C.M. (RIA) 89436; August 17, 1989Lowell E. Mann and Howard Philip Newman, for the petitioners. Raymond J. Farrell and Robert B. Van Grover, for the respondent. PARKERMEMORANDUM FINDINGS OF FACT AND OPINION PARKER, Judge: In this case respondent determined deficiencies in petitioners' Federal income tax as follows: DeficiencyAddition to TaxPetitionersYearsAmountI.R.C. Sec. 6651(a) 1David M. and Joan Green1974$ 8,434197512,26319768,80019776,64919785,94519795,11319802,796Samuel and Tillie Moritz19748,777197514,376197610,89919777,67819785,88319795,55519803,354Estate of Burton S. Brooks,deceased, Anita C. Brooks,Executrix, and Anita C. Brooks19742,68819752,365$ 591.2519762,2541977159Anita Mandel (formerly Anita C.Brooks)1978827Michael and Anita Mandel1980809Horace J. and Edith K. Waldman19748,661197514,164197610,72019777,46819785,49119794,87419802,989439 Respondent has amended his answer to assert additional interest on substantial underpayments of tax attributable to tax motivated transactions under section 6621, which applies for periods after December 31, 1984. After concessions, 2 the issues for decision are: (1) Whether petitioners have established that the HGS partnership was organized and operated with an actual and honest objective of making a profit; (2) Whether the HGS partnership's nonrecourse note to Ramwell, Inc. was includable in its depreciable basis in the "King Arthur -- The Young Warlord" motion picture; (3) Whether the HGS partnership is entitled to investment tax credits claimed with respect to its interest in the motion picture; (4) Whether respondent properly changed the HGS partnership's method of depreciation from the double-declining-balance method to the income-forecast method in order to clearly reflect income; and (5) Whether petitioners are subject440 to the increased interest rate on substantial underpayments of tax attributable to tax-motivated transactions under section 6621. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The three stipulations of facts and exhibits attached thereto are incorporated herein by this reference. Petitioners David M. Green and Joan Green were married to each other and resided in Linden, New Jersey at the time the petition herein was filed. Petitioners Samuel Moritz and Tillie Moritz were also married to each other and resided in Linden, New Jersey at the time the petition herein was filed. Petitioner Anita C. Brooks Mandel resided in Scotch Plains, New Jersey at the time the petition herein was filed. Petitioner Estate of Burton S. Brooks is the estate of the deceased husband of Mrs. Anita C. Brooks Mandel. Petitioner441 Michael Mandel resided in Scotch Plains, New Jersey at the time the petition herein was filed. He married Anita C. Brooks after the death of Burton S. Brooks. Petitioners Horace J. Waldman and Edith K. Waldman were married to each other and resided in Watchung, New Jersey at the time the petition herein was filed. In 1974, Burton R. Horowitz and Edward N. Schwartz were lawyers and in business together as labor consultants and negotiators. 3 At all times relevant petitioners-husbands Green, Moritz, and Waldman, and Burton S. Brooks (whose estate is a petitioner) were partners in a certified public accounting firm known as Moritz, Waldman & Green. 442 Heritage Enterprises, Inc. (hereinafter referred to as "Heritage") is a small publicly held corporation engaged in the business of marketing for commercial television. Arthur J. Steloff (hereinafter referred to as "Steloff") was at all relevant times president and a major shareholder of Heritage. He is engaged in the production of motion pictures through his own company, Heritage, and sometimes with other production companies. He is a member of the Motion Picture Academy of Arts and Sciences. Steloff has several years of experience in motion picture production. He has won film industry awards for his work in the productions "The Island of Dr. Moreau" and "The Black Fox." With respect to the distribution of motion pictures, however, Steloff (or Heritage) had managed only three or four attempts up to 1974, and none had been successful. Donald Havens (hereinafter referred to "Havens") was, at all relevant times until the end of 1975, vice president of Heritage and was in charge of its business affairs. In 1972 or 1973 Steloff began filming in England a production originally known as "Arthur of the Britons" and later known as "King Arthur -- The Young Warlord." Filming was completed443 by the end of 1973 or early 1974. Production of "Arthur of the Britons" started as a television series; midway into production a decision was made to simultaneously produce a motion picture which was later called "King Arthur -- The Young Warlord" or simply "The Young Warlord." The undertaking was a joint production put together by Heritage in partnership with a British network called HTV and a German company, Beta Films. The three partners shared the production costs. Steloff used a cast of professional English actors including Oliver Tobias, Peter Firth, Brian Blessed, Michael Gothard, and Jack Watson, none of whom was at that time particularly well known to the public in the United States. Steloff used professional film directors, including Sidney Hayers, Peter Sasdy and Peter Hunt. The music for the production was written by Elmer Bernstein, one of the best known and most highly respected composers in the industry. Although Steloff stated that the television series "Arthur of the Britons" was distributed "successfully," Havens testified more specifically that the television series resulting from the production did not make any money. When the film version of the production444 was completed, Steloff (or Heritage) needed money and wanted to find investors. He approached a Richard Wellbrock (hereinafter referred to as "Wellbrock") to help him sell the film. Wellbrock is a former director of Heritage and is a business broker. He was president of a corporation named Ramwell, Inc. Although he termed himself a "producer," Wellbrock regarded anyone who owned a film as a producer. Wellbrock apparently acted essentially as a broker between Heritage and prospective buyers. Wellbrock had brokered one or two films earlier, but could only recall the name of one of them. He was unaware, for example, whether "The Young Warlord" had been copyrighted, and he had no idea how the production costs of the film, said to be $ 1,100,000, had been determined. In late August or early September of 1974, Ramwell, Inc. acquired the movie "The Young Warlord" from Heritage for $ 750,000, paying $ 125,000 in cash and the rest in the form of a nonrecourse note for $ 625,000. 4 The record does not disclose the terms of the sales transaction between Heritage and Ramwell, Inc. for "The Young Warlord." 5445 About the same time Ramwell, Inc. purchased the movie, Wellbrock contacted a number of individuals including petitioner-husband Green (hereinafter referred to as "Green"). Wellbrock provided Green with a "Confidential Memorandum" discussing the tax aspects of investing in films. The "Confidential Memorandum" stated in part: The primary tax advantage results from a combination of the leverage resulting from the nonrecourse note and the rapid write off of films for tax purposes. * . * * It is apparent that the potential tax advantage illustrated above depends on leverage in the form of a substantial nonrecourse loan. * * . Green, in turn, contacted Burton R. Horowitz (hereinafter referred to as "Horowitz"). Horowitz, an attorney who was later disbarred for obtaining perjured testimony, had been engaged to some extent in the field of entertainment as a rock music concert promoter. Horowitz, however, had also made other substantial investments, including investments in stocks. A meeting was set up between Wellbrock, Horowitz, and Green to discuss motion pictures. At the meeting, Wellbrock presented information about the film then known as "Arthur of the Britons" and446 also information about an animal film. Horowitz was interested and a second meeting took place in September of 1974 between Steloff, Havens, Wellbrock, Green, Horowitz, Moritz, Waldman, and Schwartz at Green's office. Steloff made a presentation concerning various films which were available for purchase, his own background, the background of others involved in the various films, and information concerning Heritage as well as the motion picture industry in general. Horowitz himself later saw two of the available films, one the animal film, and the other "Arthur of the Britons." Horowitz preferred the film that became "The Young Warlord"; he did not like the animal picture. Horowitz was the only one of the group that became the HGS partners who saw the film before it was purchased, and he admitted he was not qualified to make an "intelligent determination" on the film. 6447 Horowitz asked Green if he and his accounting partners, Moritz, Waldman, and Brooks, wanted to invest in the film, and they agreed to do so. They set up a new partnership, HGS Productions, for that purpose. 7 Accordingly, after a series of meetings with Wellbrock, Horowitz and Green agreed, on behalf of HGS Productions (hereinafter referred to as the "HGS partnership" or simply "HGS"), to buy the film. They placed $ 10,000 in escrow to hold the film. Green has been a certified public accountant since 1958. Green reviewed certain 1973 and early 1974 financial statements of Heritage that demonstrated to his satisfaction that the company was in good financial condition. Wellbrock had presented Horowitz with all of the contracts necessary for the HGS partnership to purchase the film, including a contract of448 sale between Ramwell, Inc. and HGS and a distribution contract between HGS and Heritage. Horowitz wanted time to review the transaction and the documents, so he did not sign them immediately. At a meeting on November 22, 1974, negotiations took place until approximately 3:00 a.m. the next morning. Havens, the vice-president of Heritage, pointed out that Horowitz "negotiated almost for the fun of it * * . And we spent a very long and difficult time, concluding successfully a transaction." At the end of the meeting the deal was consummated and HGS signed the agreements, purchasing the film from Ramwell, Inc. and engaging Heritage as the distributor. The rights acquired by HGS were the rights to exploit the motion picture in the domestic market and in foreign countries other than, "West and East Germany, West and East Berlin, Austria, Lichtenstein, Switzerland and that portion of Italy known as the Alto Adige, and the United Kingdom and Eire." The domestic market includes the United States and Canada and represents 50 to 60 percent of the world market for movies. HGS acquired the film from Ramwell, Inc. for a total stated price of $ 1,050,000, which price was later reduced to449 $ 1,047,000. At the closing HGS paid Ramwell, Inc. $ 50,000 in cash. HGS agreed to pay an additional $ 33,333 on April 15, 1975, and $ 33,334 on July 15, 1975, and gave a nonrecourse note to Ramwell, Inc. in the amount of $ 875,000 payable in ten years with simple interest at six percent. Of the cash paid on November 22, 1974, $ 50,000 was paid pro rata by the partners of HGS. An additional amount of $ 58,333 was purportedly paid by Heritage, which purportedly loaned that sum to HGS on a nonrecourse basis. 8 The attendant nonrecourse note given to Heritage by HGS was unsecured and did not have a maturity date. The $ 58,333 amount of the note was to be paid without interest solely from HGS' share of the earnings from the movie. The agreement was that HGS would repay that amount from one-third of its share of receipts. HGS paid Ramwell, Inc. cash in the amount of $ 33,333 on April 15, 1975, and $ 33,334 on July 15, 1975. The partners of HGS actually paid the additional cash, in their pro rata shares, totaling $ 33,333 shortly before April 15, 1975, and an additional $ 33,334 shortly before July 15, 1975. HGS also gave a security interest in the film to Ramwell, Inc.; the security450 interest was recorded on a UCC financing statement. The $ 875,000 nonrecourse note given to Ramwell, Inc. by HGS was due on December 31, 1984. The note was secured only by the security interest in the film and was payable solely out of 50 percent of HGS' earnings from the film in excess of the first $ 175,000. 451 At the time HGS purchased the film from Ramwell, Inc., it also entered into a distribution agreement with Heritage. HGS engaged Heritage to commercially exploit the film in all available media, but restricted to those territories in which HGS itself had acquired rights. HGS granted Heritage "sole, exclusive and irrevocable" distribution rights to the film. From domestic gross receipts received by Heritage as distributor, HGS would get 75 percent of the first $ 240,000 gross receipts; 35 percent of the next $ 1,000,000; 40 percent of the next $ 500,000; and 50 percent of any additional amounts. From foreign gross receipts, HGS was to get 80 percent of the first $ 220,000 in gross receipts, and 50 percent of any amounts received thereafter. To induce HGS to acquire "The Young Warlord" and to retain Heritage as the sole, exclusive and irrevocable distributor, Arthur Steloff, individually, and Heritage gave HGS a $ 60,000 "guarantee." 9 The Heritage "guarantee" was later increased to $ 90,000. In December 1975, Heritage paid HGS $ 30,295 as part of the $ 90,000 guarantee that Heritage gave HGS. In order to avoid putting Heritage out of business, in December 1975, the partners452 of HGS personally loaned the money advanced by Heritage on the "guarantee" back to Heritage. See n.9, supra. In return, Heritage gave the individual partners promissory notes. Green calculated that, under the sales and distribution contracts, the HGS partnership would have to receive gross income from the movie of slightly more than $ 3 million in order to pay off the $ 875,000 nonrecourse453 note to Ramwell, Inc. The feature film "The Young Warlord" was released where possible before the television series. The television series consisted of 24 one-half hour shows. Because the television series was shot in 16-millimeter film, the motion picture was shot also in 16-millimeter film. Steloff conceded, however, that the state of the art in 1974 was to shoot a theatrical motion picture in 35-millimeter, which, although more costly, produced a better quality picture. The procedure for theatrical distribution of a 16-millimeter picture was to blow it up to 35 millimeters, an operation Steloff called a "dangerous process." Blowing up the film results in a grainy picture and faded colors. In 1974 Heritage was not actively engaged in the theatrical distribution of motion pictures; its activities were primarily in the television area. None of the partners of HGS, including Horowitz, had any experience in the production or distribution of motion pictures. Horowitz did not receive a report of the earnings of the television series in its earlier United Kingdom release. He received no evidence of a copyright of the motion picture. The record does not show that HGS ever copyrighted454 the motion picture. Ramwell, Inc. provided HGS with two appraisals of "The Young Warlord." The appraisals were uninformative, pro forma documents, and were received by the HGS partners several days after they had already purchased the movie. Even though none of the partners had any actual experience in the motion picture industry, no outside appraiser was ever retained to value the movie prior to its acquisition by HGS. The partners relied primarily on the glowing representations of Steloff who was admittedly trying to "hustle a deal." Other than general representations, no evidence was presented to any of the partners in HGS that the production cost of the movie was actually $ 1,100,000 as warranted in the contract dated November 22, 1974. The record in this case does not establish the amount of the production costs. Whatever the actual production cost of the movie, most, if not all, of such production cost was incurred in England where the filming occurred, with Heritage sharing such costs with its British and German co-venturers. Some post-production costs were incurred in studios in the United States, presumably solely by Heritage. The record does not establish the nature455 and extent of the rights to the movie, if any, retained by the British and German co-venturers. At the time the movie was to be released theatrically, Heritage was having "serious financial problems." Heritage's theatrical release of the film was "a very minimal release done under bad conditions." A successful theatrical distribution is a "very very expensive proposition"; this was not achieved with the movie in the present case, because Heritage was not "able financially to carry the burden." HGS and Heritage had entered into their distribution agreement on November 22, 1974. Under the terms of that agreement, Heritage was obligated to release the movie theatrically by December 31, 1974. It was virtually impossible to release a movie properly in the short time period available to Heritage after it acquired distribution rights to the movie. For that reason Heritage's actual theatrical release was "minimal." As required by the distribution agreement, the film was "released" into a few theaters at the end of 1974, and HGS was advised of that fact by Heritage. As a result of this "release," HGS received $ 384.57 from Heritage. Heritage, in providing this film to a few theaters,456 did not prepare theater trailers or "shorts," nor did it broadcast television and radio spots or prepare a press book. Heritage was financially incapable of preparing such a campaign in 1974. The "release" was not successful, and the film was withdrawn for revision. 10 On March 25, 1975, the film received a rating of "PG" from the Motion Picture Association of America, upon application by Heritage. Heritage, acting through Steloff, attempted to distribute the film theatrically by first going to the major studios such as Warner Brothers, Columbia Pictures, Paramount, etc., but was unsuccessful. Steloff next tried to distribute the film through the so-called "mini-majors," such as American International Pictures (hereinafter referred to as "AIP"), Avco Embassy, and Orion. In June of 1976, Heritage made a deal with AIP placing the majority of Heritage's457 film inventory, including 40 feature films and several television series, in the hands of AIP for a very low distribution fee. "The Young Warlord" was included in the Heritage-AIP deal. Heritage and AIP were working on several projects at the time the deal was made and Steloff felt comfortable in dealing with AIP. Heritage granted AIP the sole and exclusive right, license and privilege to distribute those films and series on television in the United States. The United States is the major television market in the world. Although HGS had a right to audit Heritage's subsequent receipts from the motion picture, HGS never conducted an audit. In August of 1976, Green wrote to Steloff inquiring about the quarterly earnings statements for 1974 through 1976 which had not been received and requesting information about the AIP contract. AIP, however, did not distribute Heritage's movies, including "The Young Warlord," and simply put those films and series on the shelf. Heritage ultimately sued AIP, spending approximately $ 500,000 in legal fees. The lawsuit between Heritage and AIP was not settled until June 1, 1979, and Heritage at that time regained the right to distribute the properties458 it had licensed to AIP. Horowitz wrote a letter dated April 15, 1977, to Steloff, demanding the additional $ 60,000 that Heritage had promised as a guarantee. During the time the exclusive distribution deal with Heritage and/or AIP was in effect, however, Horowitz purportedly contacted others in the motion picture business about marketing the motion picture. However, neither HGS nor Horowitz had any right to distribute the movie under the terms of the distribution agreement with Heritage. Heritage had the sole right to distribute the movie, and HGS did not have the right to change distributors. Among others Horowitz allegedly contacted was his original advisor, Bud Fillipo, who was unable to help him. Horowitz showed the film to Edward Tone, an acquaintance. Tone met Mr. Carlos, a representative of Brazil, through Ed Murphy of Bit Media, one of the largest advertising time buyers in the country. Tone and Carlos negotiated a promotion whereby Carlos would purchase the rights to exploit the film in South America for three years for a minimum royalty of $ 300,000 to be split 50/50 between Tone and HGS. Steloff, however, vetoed the deal. Assuming that Horowitz in fact made the459 above-described attempts to distribute the film, it is clear that Heritage (and/or AIP) had sole distribution rights to the film at that time. In 1980 Horowitz, on behalf of HGS, sued Steloff and Heritage. That suit was still pending at the time of the trial in this case. Notwithstanding the pendency of that litigation, in 1983 Steloff wrote to Horowitz inquiring whether, "as I have discussed with you," the partnership would be interested in investing in "YOUNG WARLORD, PART II." The letter continued -- As you know on the original "YOUNG WARLORD" we had to wait for the market to accept action/adventure with historic overtones (a costumer); the market is now very ready and indeed is "grown up" to where it is ready for another film in this genre. * * . The record does not show whether or not filming of this sequel was ever commenced. Several settlement offers to resolve the lawsuit between HGS and Heritage have been made by Steloff and Heritage, but they have been unacceptable to the other litigants. During the late 1970's and early 1980's, increases in interest rates caused further financial problems for Heritage due to loans advanced to Heritage. In order to survive460 financially, Heritage retained for its own use and failed to report the receipt of income to several groups of film owners whose films Heritage was distributing. During the time it was trying to exploit "The Young Warlord" commercially, between 1977 and 1984, Heritage had entered into 18 agreements with other parties to exploit the film commercially in South Africa, South America, Latin America, Spain, France, Belgium, Israel, Australia, New Zealand, Hong Kong, Nigeria, Canada, Italy, Scandinavia, and Lebanon. These agreements were the result of package deals in which Heritage licensed the rights to a number of films in a single package. The figures for any resulting income attributable to "The Young Warlord," as set forth below, represent only Steloff's allocation, based on his best guess as to the amount that should be allocated to that motion picture, as part of a package of several films. 11461 For the period January 1, 1977 through September 30, 1984, HGS, according to Steloff's best guess, should have received, but did not receive, approximately the following revenue on account of the film (including proceeds from videocassette licensing) from Heritage: Domestic Gross:$ 42,330.13Less: Distribution Fee:10,582.53$ 31,747.60Foreign Gross:$ 54,061.14Less: Distribution Fee:10,812.22$ 43,248.92Total due HGS$ 74,996.52Out of the $ 74,996.52, Heritage would be entitled to retain $ 24,998.83 (one-third) as partial repayment of the $ 58,333 purportedly advanced to Ramwell, Inc. on behalf of HGS at the closing (on November 22, 1974) of the purchase of the film. Additionally, as of September 1985, Heritage was owed some other monies which it had not received from exploitation of "The Young Warlord." See n.11, supra. Of that amount, HGS would be entitled to some $ 6,611.62 (which presumably will be reduced by approximately $ 2,204 to reflect additional repayment of Heritage's purported advance to Ramwell, Inc. on behalf of HGS). Although HGS obtained the right to quarterly reports from Heritage and the right to462 audit the Heritage books, HGS has never enforced these rights nor attempted such an audit. At the end of 1984 the nonrecourse liabilities between Heritage and Ramwell, Inc. and between Ramwell, Inc. and HGS were extended for another 10 years. No principal or interest payments had been made on either note for the initial 10 years. HGS' note for $ 1,400,000 (principal and interest) and Ramwell, Inc.'s note for $ 625,000 (principal only) were extended for another 10 years pursuant to the terms of the original Sales and Distribution Agreements. 12 The recited consideration was $ 1 and the extension of time within which the debt might be paid from revenues generated by the film. Heritage continued to be the sole, exclusive and irrevocable distributor of "The Young Warlord." 463 For the years before the Court, 1974 through 1980, HGS on its partnership tax returns reported gross receipts and claimed depreciation deductions as follows: ReportedDepreciationYearGross ReceiptsDeduction Claimed1974None $ 24,9291975$ 40,906 13292,0201976None 208,58619772,211 148,99019781,500 106,4211979None 76,0151980None 54,297Total$ 44,617 $ 911,258HGS, for the years 1974 through 1980, claimed ordinary losses on its partnership tax returns in the following amounts: 1974$ 24,9291975261,3401976208,5861977147,3321978104,921197976,015198054,297464 The following table shows the after-tax gains (but for the instant case) made by the respective petitioners as a result of the distributive share of HGS' losses claimed by the respective petitioners: Tax SavingResulting fromInvestmentPetitionersCash Investmentin HGSDifferenceDavid M. & Joan Green$ 11,667$ 50,000$ 38,333Samuel & Tillie Moritz11,66756,52244,855Horace J. & Edith K.Waldman 1411,66753,13441,467Estate of Burton S.Brooks, deceased,Anita C. Brooks,Executrix & AnitaC. Brooks3,8877,4663,579Anita Mandel 15-- 827827Michael & AnitaMandel 16-- 809809 465 Green determined that HGS would depreciate the film pursuant to the double-declining-balance method, and HGS' depreciation deductions were calculated according to that method. The HGS partners also claimed investment tax credits, computed on a purchase price of $ 1,047,000 for "The Young Warlord." OPINION In this case petitioners formed a partnership to invest in a motion picture entitled "The Young Warlord." They paid for rights to exploit the film in the United States and in certain foreign countries. The recited purchase price for the motion picture was $ 1,047,000, some $ 172,000 payable in cash and the balance, $ 875,000, in the form of a nonrecourse note payable solely out of exploitation proceeds. See n.24, infra. The motion picture met with very little success -- far too little income was earned to pay off any of the nonrecourse liability of the partnership. Petitioners, however, claimed large depreciation deductions and investment tax credits, which they utilized to lower their Federal taxes that otherwise would have been owing upon their substantial income from other sources. Respondent has challenged these deductions, claiming that the motion picture investment466 was a sham because it lacked economic substance. Respondent further claims that the deductions should be limited to the amount of gross income earned by the motion picture because the partnership failed to establish that the investment in the motion picture was made with the requisite profit objective required by section 183. Respondent also attacks the basis and method of computing the depreciation deductions and investment tax credits reported by the partnership and claimed by the partners on their individual returns. This case presents another in a long series of cases in which a partnership or individual has invested in a motion picture that has met with little success but has generated large claimed tax benefits for the investors. We have allowed these tax benefits, as appropriate, when the investments have been shown to be valid profit-oriented ventures. See, e.g., Taube v. Commissioner, 88 T.C. 464">88 T.C. 464 (1987); Wildman v. Commissioner, 78 T.C. 943">78 T.C. 943 (1982). When, however, the investment is not a profit-seeking activity, but rather one where large nonrecourse liabilities have been used to generate only tax benefits, we have had little difficulty467 in sustaining the disallowance of the tax benefits claimed. See, e.g., Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984). 17Profit ObjectiveRespondent's profit-objective argument, if accepted, would be largely dispositive of the case before us. We will therefore first address the issue whether the purchase and attempted exploitation of "The Young Warlord" were activities not engaged in for profit within the meaning of section 183. 18468 Whether an activity is engaged in for profit turns on whether the taxpayer entered into or carried on the activity with an actual and honest objective of making a profit. Elliott v. Commissioner, 90 T.C. 960 (1988); Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983); Engdahl v. Commissioner, 72 T.C. 659">72 T.C. 659, 666 (1979); Golanty v. Commissioner, 72 T.C. 411">72 T.C. 411, 426-427 (1979), affd. without published opinion 647 F.2d 170">647 F.2d 170 (9th Cir. 1981). 19 Whether an activity carried on by a partnership is carried on with the requisite profit objective is determined at the partnership level. Brannen v. Commissioner, supra, 78 T.C. at 502-505. As this Court has previously stated, section 183 is not a disallowance provision, but rather allows a taxpayer to deduct certain expenses that he could not otherwise deduct. Fox v. Commissioner, 80 T.C. 972">80 T.C. 972, 1006 (1983),469 affd. without published opinion 742 F.2d 1441">742 F.2d 1441 (2d Cir. 1984), affd. sub nom. Barnard v. Commissioner , 731 F.2d 230">731 F.2d 230 (4th Cir. 1984), affd. without published opinions sub nom. Hook v. Commissioner, Krasta v. Commissioner, Leffel v. Commissioner, Rosenblatt v. Commissioner, Zemel v. Commissioner, 734 F.2d 5">734 F.2d 5, 6-7, 9 (3d Cir. 1984); Brannen v. Commissioner, supra, 78 T.C. at 500. If an activity is not engaged in for profit, section 183(b) separates the claimed deductions into two groups. Section 183(b)(1) allows only those deductions which are not dependent upon a profit objective, e.g., interest and taxes. Section 183(b)(2) allows the balance of the deductions which would otherwise be permitted only if the activity was engaged in for profit, but only to the extent that the gross income derived from the activity exceeds the deductions allowed under paragraph (1). Depreciation deductions are allowable under section 183(b)(2). Sec. 1.183-1(b)(1)(iii), Income Tax Regs.During the years before the Court, petitioners' HGS partnership reported no income from the movie for 1974, 1976, 1979, and 1980. 470 For 1975, HGS reported $ 40,906; 20 for 1977, some $ 2,211; and for 1978, $ 1,500. If we find the motion picture investment was an activity not engaged in for profit, the claimed depreciation deductions will be allowable as a deduction under section 183 up to those amounts. Sec. 1.183-1(b)(1)(iii), Income Tax Regs. We also note, however, that section 183 speaks only in terms of the allowance of deductions. It is clear that no investment tax credit is allowable for property used in an activity not engaged in for profit. See secs. 48(a), 167 and 183(c); Hagler v. Commissioner, 86 T.C. 598">86 T.C. 598, 622 (1986), affd. without published opinion sub nom. Dahlmeier v. Commissioner, 822 F.2d 63 (11th Cir. 1987). 21471 The term "profit" in the context of section 183 means economic profit, independent of tax savings. Soriano v. Commissioner, 90 T.C. 44">90 T.C. 44, 54 (1988); Herrick v. Commissioner, 85 T.C. 237">85 T.C. 237 (1985); Surloff v. Commissioner, 81 T.C. 210">81 T.C. 210 (1983). Petitioners thus must establish that their partnership entered into the motion picture business with an actual and honest profit objective. Fox v. Commissioner, supra, 80 T.C. at 1006; Dreicer v. Commissioner, supra, 78 T.C. at 644-645. While a reasonable expectation of profit is not required, the partnership must have had an actual and honest objective of making a profit. Sec. 1.183-2(a), Income Tax Regs.; Beck v. Commissioner, 85 T.C. 557">85 T.C. 557, 569 (1985); Flowers v. Commissioner, 80 T.C. 914">80 T.C. 914, 931 (1983); Dreicer v. Commissioner, supra, 78 T.C. at 644-645; Allen v. Commissioner, 72 T.C. 28">72 T.C. 28, 33 (1979); Bessenyey v. Commissioner, 45 T.C. 261">45 T.C. 261, 274 (1965), affd. 379 F.2d 252">379 F.2d 252 (2d Cir. 1967). The issue is one of fact to be resolved on the basis of all the surrounding472 circumstances. Beck v. Commissioner, supra, 85 T.C. at 570; Flowers v. Commissioner, supra, 80 T.C. at 931-932; Lemmen v. Commissioner, 77 T.C. 1326">77 T.C. 1326, 1340 (1981); Dunn v. Commissioner, 70 T.C. 715">70 T.C. 715, 720 (1978), affd. 615 F.2d 578">615 F.2d 578 (2d Cir. 1980). Petitioners have the burden of proving the requisite profit objective. Rule 142(a); Beck v. Commissioner, supra; Flowers v. Commissioner, supra; Golanty v. Commissioner, supra, 72 T.C. at 426. In making this factual determination, we give greater weight to objective factors than to the taxpayer's mere statement of his intent. Sec. 1.183-2(a), Income Tax Regs.; Beck v. Commissioner, supra; Flowers v. Commissioner, supra; Siegel v. Commissioner, 78 T.C. 659">78 T.C. 659, 699 (1982); Churchman v. Commissioner, 68 T.C. 696">68 T.C. 696, 701 (1977). Section 1.183-2(b), Income Tax Regs., lists some nine of the relevant factors to be considered in determining whether an activity is engaged in for profit. 22 However, all nine factors do not necessarily apply in every473 case, and those that do not apply need not be discussed where no purpose would be served. See, e.g., Waddell v. Commissioner, 86 T.C. 848 (1986), affd. 841 F.2d 264">841 F.2d 264 (9th Cir. 1988). Our cases provide other examples of relevant factors. See, e.g., Flowers v. Commissioner , supra, 80 T.C. at 937; Estate of Baron v. Commissioner, 83 T.C. 542">83 T.C. 542, 558-559 (1984), affd. 798 F.2d 65">798 F.2d 65 (2d Cir. 1986), where we noted that a highly inflated nonrecourse note can contribute to a determination of a lack of a profit objective with respect to the property securing the note. 474 In this case we find very little indication that the HGS partnership had an actual and honest objective of earning a profit from the investment in and exploitation of "The Young Warlord." Most importantly, the HGS partnership, although composed of lawyers and accountants, did not conduct the partnership in a businesslike manner. Initially the partnership failed to determine whether it had obtained proper title to the motion picture so that it could exploit the picture in the United States market. The television series on which the motion picture was based and the movie itself were the product of a joint venture between Steloff's company, Heritage, and other British and German entities. That fact alone should have put the partners on notice that they had to be certain that they had obtained the rights to exploit the motion picture from the proper party, yet they did not undertake to make that determination. They relied instead only on vague assurances of Wellbrock and Steloff that the movie was theirs to sell. Actually the movie was first sold by Heritage to Wellbrock's company, Ramwell, Inc. The record is singularly devoid of information as to the terms of that sales agreement475 between Heritage and Ramwell, Inc. The HGS partnership's rights to "The Young Warlord" would be limited to whatever rights Ramwell, Inc. itself had acquired from Heritage and had available to sell. The partners should also have ascertained whether they had a valid copyright to the film, for their ownership of a valid copyright was necessary for the successful exploitation of the film. Durkin v. Commissioner, 87 T.C. 1329">87 T.C. 1329, 1368-1369 (1986), affd. 872 F.2d 1271">872 F.2d 1271 (7th Cir. 1989). 23 Again they failed to do so. The record does not establish that HGS ever obtained a copyright to the film. Nor did they obtain any independent appraisals of the value of the motion picture before they bought it. They relied only on the assurances of its value from Steloff, who needed money and was obviously interested in attracting investors in the picture. Steloff admittedly was "hustling a deal" and was engaged in sales puffery. The only appraisals petitioners received were received a couple of days after they had already signed the sales contract for the film; these so-called appraisals were so sketchy and uninformative as to be virtually meaningless. No reasonable person476 could have relied on these so-called appraisals. The HGS partnership also failed to substantiate whether the makers of the film had in fact incurred the production costs of some $ 1,100,000 that might provide some indication of the maker's investment in the film and perhaps provide some indication to the investors of the film's value. Siegel v. Commissioner, supra, 78 T.C. at 687-688. Again, the HGS partners only took the promoter's word as to the costs to make the movie. Moreover, a reasonable investigation of the economic viability of the motion picture would have informed the HGS partnership that a film shot in 16-millimeter film was not commercially acceptable in the American market, where the state of the art was to produce motion pictures shot in 35-millimeter. Indeed, further investigation of the status of their proposed investment by the partners would likely have revealed, as their own expert testified, that the motion picture would have yielded them far less in domestic revenues than the ostensible price that they "paid" for the motion picture. The "expertise" of the HGS partners477 or their advisors does not support a finding of any profit objective. None of the partners knew anything about motion pictures. Only Horowitz viewed the film before the sale, and he admitted he was not qualified to make a determination as to its value. His purported advisor and friend, Bud Fillipo, did not testify at the trial, and the failure to call him as a witness was never explained. It was at least obvious to the HGS partners that the only way they could hope to obtain a profit from exploitation of the motion picture was by having it successfully distributed in the United States and in foreign markets. Yet they blindly entered into a distribution contract with Heritage, based upon the prepackaged arrangements for the investment. They had no right under that distribution contract to change distributors. Heritage was the sole, exclusive and irrevocable distributor. In effect Steloff continued to effectively control "his film" despite its purported sale first to Ramwell, Inc. and then from Ramwell, Inc. to HGS. The HGS partners failed to investigate whether Heritage had ever distributed a picture that had been profitable for its owners. They did not seek to discover what478 was necessary to carry out such a distribution, or whether Heritage had the assets or the know-how to engage in such a distribution. As Steloff candidly admitted, Heritage was in bad financial condition and could not undertake such a distribution during the time required -- but the partners failed to ascertain that fact before they invested and bound themselves to Heritage as the sole distributor. There is no indication that anyone connected with the partnership sufficiently investigated the picture or its prospects so as to support a reasonable expectation or indeed any expectation that the film could be distributed successfully. Horowitz testified that because of Steloff's representations "the dollar bills were floating around in front of our eyes" and that some unidentified "friends in the industry" checked Steloff out and told Horowitz "to shoot crap with [Steloff] because you will be rolling in bushels of money." The Court disregards this purported reliance on Steloff and the purported advice of unidentified friends as more of Horowitz' own self-serving puffery. In any event, at the very least, Horowitz' testimony shows that the HGS partners failed to make any reasonable479 investigation before purchasing the film. These partners were lawyers and accountants, not unsophisticated, unschooled individuals unaccustomed to the business world. The explanation for their failure to investigate is that they were impelled by the tax benefits of the transaction, not by any actual and honest objective of making an economic profit. Indeed, the record clearly reveals that there was inadequate preparation for distribution of the film. There was not enough time for a successful completion in terms of editing and promotion of the motion picture between the time of the partnership's investment, November 22, 1974, and the December release date of the motion picture required by the distribution agreement. Again the tax imperative of having the film placed in service by the end of the year overrode reasonable business considerations. See n.25, infra. There was nothing indicating either in 1974 or later that the picture would appreciate in value. The letter from Steloff to Horowitz in 1983, promoting an investment in "The Young Warlord, Part II," indicated that in 1974 the market was not then ready for "a costumer," meaning, apparently, the first "The Young Warlord. 480 " Nor does the record indicate that any market ever developed for "The Young Warlord" or any sequel. None of the partners showed any success in similar fields. We are inclined to give little weight to the testimony of Horowitz that he made "some dollars" successfully putting on some rock concerts. And while the income of petitioners from their accounting business shows success in the dissimilar field of accounting, we do not think that such success indicates that they were striving for similar economic success in the motion picture business. Their success in obtaining handsome incomes from their accounting business instead suggests that they were looking for tax shelter from the film. The only direct impact that any of the partners had on the operations of the HGS partnership was in the tax area; petitioner Green selected the double-declining-balance method of depreciation and prepared the tax returns which reflected the substantial tax benefits claimed as a result of that method of depreciation. In terms of actual income and profits from the operation, the motion picture had an unrelieved record of losses. Even the amounts gleaned from Steloff's 18 contracts for foreign exploitation481 of the film failed to yield any amounts of income approaching the amounts needed to repay the nonrecourse note. At most only $ 74,996.52 was earned over about an eight-year period. The financial status of the partners is revealing. Notwithstanding the failure of the film to earn any money, the tax benefits generated, as set forth in the Findings of Fact above, show that the partners received in tax benefits far more than the cash that they invested. The ratio of nonrecourse notes to cash invested was about 7 to 1 in this case. The ratio of large tax benefits to minimal cash invested is a further indication that the HGS partnership did not have an actual and honest objective of making a profit from exploitation of the motion picture. The total cash invested was, even using petitioners' figures, at most only some $ 172,000, and the partnership claimed depreciation deductions of over $ 911,000 plus investment tax credits based on a purported $ 1,047,000 purchase price. On paper, of course, the HGS partnership was liable for a much greater amount, the $ 875,000 nonrecourse note. There was also the nonrecourse obligation for the $ 58,333 Heritage purportedly loaned to the partners482 as part of their putative $ 172,000 cash down payment. 24 In this case, however, there was no obligation or incentive for the partners to pay the notes out of any funds other than those received from exploitation of the movie. As a practical matter, the partners could and did simply ignore the nonrecourse notes; in fact, they extended the notes for another 10 years. In similar situations, our conclusion that a transaction was not entered into for profit has been buttressed by the presence of large amounts of debt that would be payable only if highly speculative properties happened to gain public acceptance and make large amounts of money. See Estate of Baron v. Commissioner, supra, 83 T.C. at 553; Flowers v. Commissioner, supra, 80 T.C. at 937. 483 Finally, notions of personal pleasure are not significant to our holding. We do note that Horowitz, who concededly knew nothing about the motion picture business, selected "The Young Warlord" for the partnership in part because he liked it better than the animal film he was shown as an alternative investment. We are not persuaded by petitioners' insistence that the partnership's negotiations with Wellbrock and Steloff were at arm's length. We especially do not accept the notion that hard bargaining was necessary to get Steloff and Wellbrock to agree to take back nonrecourse financing. The sale between Heritage and Wellbrock's corporation, Ramwell, Inc., was based on a large, nonrecourse note, and the amount of the nonrecourse financing was simply increased in the sale from Ramwell, Inc. to HGS. Wellbrock, in fact, had provided a prospectus to Green indicating that nonrecourse financing was the proper way for the partnership to invest in the motion picture in order to gain the anticipated tax benefits. Moreover, Green and the other HGS partners were too sophisticated as lawyers and accountants to put themselves economically at risk against the dicey and unexplored possibilities484 that "The Young Warlord" could ever generate $ 3 million in revenues, which was required to enable them to pay off the nonrecourse notes, let alone to make any profit on their investment. Nor are we impressed with the subsequent attempts of the partnership to show that Horowitz supposedly attempted to badger Steloff into further promotional efforts, or supposedly attempted to promote the film himself. These supposed attempts do not show that the partnership was after a profit from its investment. The HGS partnership had bound itself by the distribution agreement with Heritage as shown by the fact that Steloff vetoed the deal Horowitz or Tone supposedly made with the Brazilian group. Under their agreement with Heritage, the HGS partners could not change distributors. Based upon the foregoing, we conclude that the HGS partnership did not invest in the motion picture with an actual and honest objective of making a profit. Accordingly, we conclude that the amount of any deductions that the partnership may claim is limited to the amount of partnership gross income generated by the motion picture. Furthermore, as discussed above, we hold that the partnership is not entitled to claim485 any investment tax credits. 25486 Inclusion of Nonrecourse Indebtedness in BasisTo the limited extent that we allow petitioners to claim depreciation deductions in this case, their deductions are limited to the amount of their basis in the movie. See sec. 167(g). Section 167(g) provides that the basis for depreciable property is the adjusted basis provided in section 1011. Section 1011 provides that in determining the gain or loss from the sale or other disposition of property, the basis of such property, as provided in section 1012, is its cost. Where the property is acquired by purchase, generally the basis includes the amount of liabilities assumed (or the property taken subject to such liabilities) by the purchaser. Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947); Parker v. Delaney, 186 F.2d 455">186 F.2d 455 (1st Cir. 1950); Blackstone Theatre Co. v. Commissioner, 12 T.C. 801">12 T.C. 801, 804 (1949). The mere fact that the liability is secured only by the asset transferred and the purchaser otherwise has no personal liability will not, in and of itself, prevent such liability from being included in the basis of property. Mayerson v. Commissioner, 47 T.C. 340">47 T.C. 340 (1966).487 It is well settled, however, that depreciation is based not on mere legal title, but on actual investment in the property. Narver v. Commissioner, 75 T.C. 53">75 T.C. 53, 98 (1980), affd. per curiam 670 F.2d 855">670 F.2d 855 (9th Cir. 1982). Accordingly, we will not include in basis a purported nonrecourse liability if it lacks economic substance or is too contingent to be treated as valid debt for tax purposes. In determining whether a purported nonrecourse liability lacks economic substance or is too contingent or speculative to be treated as valid debt for Federal tax purposes, the courts have used various approaches. One line of cases looks at the fair market value of the property in relation to the stated purchase price or the principal amount of the indebtedness. This line of cases treats a nonrecourse obligation as a valid debt only if the acquired property reasonably secures payment of the obligation. Where the nonrecourse obligation is not adequately secured, a purchaser would acquire no equity in the property and therefore would have no economic incentive to pay the note. Estate of Franklin v. Commissioner, 544 F.2d 1045">544 F.2d 1045 (9th Cir. 1976), affg. 488 64 T.C. 752">64 T.C. 752 (1975); see also Waddell v. Commissioner, supra; Odend'hal v. Commissioner, 80 T.C. 588">80 T.C. 588, 604-605 (1983), affd. 748 F.2d 908">748 F.2d 908 (4th Cir. 1984); Hager v. Commissioner, 76 T.C. 759">76 T.C. 759, 773-774 (1981); Narver v. Commissioner, supra, 75 T.C. at 98-100; Beck v. Commissioner, 74 T.C. 1534">74 T.C. 1534, 1552 (1980), affd. 678 F.2d 818">678 F.2d 818 (9th Cir. 1982). The other major approach holds that an obligation, even if recourse, will not be treated as a true debt where payment, according to its terms, is too contingent or speculative. See Denver & Rio Grande Western R.R. Co. v. United States, 505 F.2d 1266">505 F.2d 1266 (Ct. Cl. 1974) (obligation payable at rate of 32 percent of carload freight traffic revenue after movement of 100,000 net tons per year); Lemery v. Commissioner, 52 T.C. 367">52 T.C. 367 (1969), affd. per curiam on another issue 451 F.2d 173">451 F.2d 173 (9th Cir. 1971) (obligation contingent upon business sold showing net profit); Columbus & Greenville Railway Co. v. Commissioner, 42 T.C. 834">42 T.C. 834 (1964), affd. per curiam 358 F.2d 294">358 F.2d 294 (5th Cir. 1966),489 cert. denied 385 U.S. 827">385 U.S. 827 (1966) (obligation to pay based on mileage of railroad lines); Albany Car Wheel Co. v. Commissioner, 40 T.C. 831">40 T.C. 831 (1963), affd. per curiam 333 F.2d 653">333 F.2d 653 (2d Cir. 1964) (obligation for severance pay -- incurred as part of acquisition of assets of predecessor corporation -- contingent upon failure to give employees notice prior to closing plant). This "contingent obligation" approach has been applied recently in tax shelter cases involving nonrecourse loans where the principal was payable out of exploitation proceeds. See, e.g., CRC Corp. v. Commissioner, 693 F.2d 281 (3d Cir. 1982), affg. in relevant part, revg. and remanding on other grounds Brountas v. Commissioner, 73 T.C. 491 (1979) (payment of note contingent upon discovery of recoverable amounts of oil or gas); Brountas v. Commissioner, 692 F.2d 152">692 F.2d 152 (1st Cir. 1982), vacating and remanding on other grounds 73 T.C. 491">73 T.C. 491 (1979) (same); Gibson Products Co. v. United States, 637 F.2d 1041">637 F.2d 1041 (5th Cir. 1981) (same); Estate of Baron v. Commissioner, supra, 83 T.C. at 550-553490 (note payable solely out of proceeds of record sales); Fox v. Commissioner, supra, 80 T.C. at 1022-1023 (note payable solely out of book sale proceeds); Saviano v. Commissioner, 80 T.C. 955">80 T.C. 955 (1983), affd. 765 F.2d 643">765 F.2d 643 (7th Cir. 1985) (note payable solely out of sales proceeds of mined gold); Graf v. Commissioner, 80 T.C. 944 (1983) (note payable solely out of profits from foreign dredging operation). The contingent liability theory is in many ways complementary to Estate of Franklin's reasonable security approach. Fox v. Commissioner, supra, 80 T.C. at 1020. As we said in Waddell v. Commissioner, supra, 86 T.C. at 902, both theories represent efforts by the courts to validate from objective criteria the assumption upon which a valid nonrecourse debt (for tax purposes) is predicated -- the assumption that the obligation will be paid. A nonrecourse debt will be recognized for tax purposes only if it appears likely from all the facts and circumstances that the obligation will be paid. The HGS partnership's nonrecourse promissory note to Ramwell, Inc. for $ 875,000 and491 its nonrecourse liability to Heritage for $ 58,333 must be tested under these principles. If we cannot conclude at the outset of the transaction that payment of the nonrecourse note or other nonrecourse liability is likely, then the note or other liability is too contingent or speculative to be recognized for tax purposes. On this record we cannot find that the $ 875,000 nonrecourse note or the other nonrecourse liability of $ 58,333 was adequately secured. Indeed the record is barren of any persuasive testimony or other probative evidence showing that "The Young Warlord" was worth at least the amount of the nonrecourse indebtedness. Petitioners initially offered the testimony of Steloff himself as an "expert," but we discount his testimony. Steloff made the film; he needed money and was interested in selling it to others and in doing what he could to inflate the film's value. His testimony could scarcely be called objective. 26Steloff's testimony that the motion picture was worth "several million dollars" is also belied by his own actions and those of his company, Heritage. He sold the motion picture to Ramwell, Inc. for $ 125,000 in cash and a $ 675,000 nonrecourse note.492 No payments were ever made on that note. When at the end of the 10-year period the note due to Heritage was not paid off, Steloff (or Heritage) could have reacquired the motion picture from Ramwell, Inc. Instead, for the recited payment of $ 1, he extended the note due from Ramwell, Inc. for another 10 years. In turn, Ramwell, Inc. extended the note due from the HGS partnership for another 10 years. Petitioners' other expert, Ralph E. Donnelly, did not aid their cause. Mr. Donnelly was in charge of acquiring motion pictures for exhibition at a major New York motion picture chain, and, previously, he had national experience as head film buyer for RKO Stanley Warner Theaters. He prepared a written report which was so skimpy and lacking in detail as to be virtually useless. He testified that the motion picture "The Young Warlord" was "timeless" as a "period piece"; it did not date itself because of changed automobile models, 493 or changing fashions. He conceded, however, that period pieces generally did not do well unless they featured actors with high name recognition. Mr. Donnelly approved of the acting job of the lead in the film, Oliver Tobias, but he stated that he could not find that actor's name in his reference books. He stated that the film was "very interesting, and very well made," and that it had a "rich looking feel." But he further stated that the film was "choppy" and the "editing was bad," likely because the film had "three different directors and two different script writers." He stated that reediting might improve the film, or might make it worse. He estimated that the picture would earn $ 1 million in gross box office receipts, to be split between the distributor and the exhibitors (theaters). His report estimated that the picture would earn the distributor some $ 500,000 in "domestic United States" net theatrical revenues. That figure was based on gross box office receipts of $ 1,000,000. But then, assuming what he thought to be a reasonable 75/25 percent distribution deal between the producer (film owner) and distributor, he estimated that the gross receipts to the producer of494 the picture (that is, to the HGS partnership) would be $ 375,000, or 75 percent of the distribution receipts. Petitioners' own expert's figures, therefore, indicate that domestic exploitation of the film could generate only approximately one-third the revenues needed to recover the cost (production costs or HGS's purchase price) of the film. The United States domestic market usually includes the United States and Canada and that market represents about 50 to 60 percent of the world market for movies. Mr. Donnelly's report, however, was apparently limited to just the United States. Respondent offered the testimony of William A. Madden, who had been a vice president in charge of distribution of Metro-Goldwyn-Mayer, and, upon retirement, a consultant and teacher of motion picture economics at the University of California at Los Angeles. Madden is an expert with a long and distinguished career in the distribution of motion pictures. Madden testified that the actual motion picture appears too episodic; the picture is so fragmented and confusing that it fails to be an entertaining motion picture. 27 He observed that the names of the producer, director, and cast of the motion picture495 are unknown to the average moviegoer and theater exhibitor and would not mean very much to them in terms of marketing the film. He also noted that the motion picture was filmed originally in 16-millimeter film. Almost all theaters in the United States, however, show 35-millimeter movies only. Because the film was blown up from 16 millimeters to 35 millimeters, the movie was "very grainy" and "the color was faded." Madden explained that theater owners do not like to show films that are blown up from 16 to 35 millimeter because when you blow up the picture for the large screen, it becomes very grainy and the picture loses definition. To Madden, the motion picture had "abrupt jumps," shifting from one scene to another as if reels were missing. He concluded that "The Young Warlord" was a poorly made film. Madden further testified that theater exhibitors will not usually take a picture without a properly prepared advertising campaign. 496 Madden went on to describe the economics of film distribution. He stated that the general rule in the motion picture industry is that one must take in film rentals of 2-1/2 to 3 times the negative cost or production cost of making the picture in order to break even. Film rentals are that share of the box office receipts that the theater owner remits to the distributor. Here, Madden explained, the HGS partnership would need film rentals of approximately $ 3.3 million to recover the alleged $ 1,100,000 cost of making the picture or their putative $ 1,047,000 purchase price of the film. Another general rule in the movie industry, Madden testified, is that in order for a producer (film owner) to achieve a particular film rental, the box office receipts -- that is the amount taken in by the exhibitor -- received at the theaters must be approximately two and one-half times the targeted film rentals. Therefore, in order to achieve the targeted $ 3.3 million film rentals, the movie here would have to gross at the box office some $ 8 million dollars. In order to achieve this amount of revenue in gross box office receipts and film rentals, this film would have had to achieve the status, 497 in 1974, of what is called a "box office champ." To Madden, this picture, "The Young Warlord," could never have achieved the necessary box office receipts or film rentals necessary to achieve such a status because the picture was not well made, was not entertaining, and did not have the necessary production qualities. Madden further testified that Heritage, known as a small television marketing company, did not have the necessary clout or established relationships in the industry to distribute a picture. Madden concluded that, because the film could not cover its expenses, it had "no theatrical value." Respondent also offered the testimony of Woodrow Sherrill, another former officer of Metro-Goldwyn-Mayer, who had left to work in motion picture distribution on his own. Sherrill's testimony, like Madden's, concluded that the picture has no theatrical value because the cost of advertising and distribution would exceed the film rentals that could be received; Sherrill explained that the distribution value of a picture is important in determining the motion picture's worth, since it is through the distribution of a picture that its cost is recouped and any profit is made. Sherrill498 estimated that, under the terms of the distribution contract between HGS and Heritage, in order for HGS to recoup the acquisition price paid for the motion picture, the picture would have to earn $ 12,960,000 in box office receipts. For the year of release, 1974, that would have made the picture one of the top 50 pictures of the year. The picture, Sherrill concluded, did not have the necessary qualities to do that kind of business. 28Petitioners attack the conclusion of Madden and Sherrill, arguing that their zero-value analysis ignores the foreign499 income receipts to be gained from exploitation of the film. We do not think that petitioners' argument avails them much. The record establishes that Steloff did an assiduous job of lining up worldwide exploitation of the motion picture. Nevertheless, his 18 foreign contracts yielded only some $ 50,000 in potential revenue to the HGS partnership in an eight-year period (assuming, of course, that Heritage can ever find its way clear to pay over the amounts it purportedly owes to HGS). Petitioners have not established that the motion picture could earn any more than it did under the agreement with Heritage and with Steloff's efforts. We think that substantial foreign earnings were unlikely. The picture is an English-language production, featuring a story of English folklore and mythology. It seems that the foreign market for such a film is, by virtue of its subject matter and language, rather limited. Yet, other than domestic United States consumption, the only major English-speaking areas where the picture might have been exploited were Australia, South Africa, and New Zealand. The HGS partnership did not have the rights to exploit the film in the United Kingdom and Eire. Steloff500 negotiated a number of contracts in Australia and New Zealand, apparently without any economic success. In any event, the domestic market (United States and Canada) represents 50 to 60 percent of the world market for movies. Respondent also offered the testimony of Robert M. Newgard, formerly with Paramount Pictures as vice president of worldwide sales. Newgard testified that in 1974 the picture had a potential television value of $ 35,000 to $ 40,000. Moreover, to Newgard,"The Young Warlord" was "a very nice little picture" but "the story jerks around" and is confusing. The movie appeared to be confusing because "it was a television series and it was hooked together" to make a motion picture. Petitioners urge that Newgard did not properly account for a "second cycle" release of the motion picture for television and, further, that Newgard did not give proper account for the cable television market. Those arguments do not dissuade us from accepting Newgard's views. He testified that, as the deal was originally structured, the HGS partnership initially might not have held the picture long enough to guarantee it the right to sell for an anticipated "second cycle," and that cable501 television, in 1974, was still in its infancy. On balance, we conclude that there is nothing in the way of expert testimony, nor in the actual performance of the film, that would indicate that "The Young Warlord" had anything approaching the economic value needed to pay off the $ 875,000 nonrecourse note it secured for the HGS partnership. Moreover, the nature of the movie investment shows that the possible repayment of this nonrecourse indebtedness was too contingent to support its inclusion in the partnership's basis. The nonrecourse promissory note for $ 875,000 given by the HGS partnership to Ramwell, Inc. was payable only out of 50 percent of HGS' earnings from the motion picture after the first $ 175,000. Generally, when debt principal is paid solely out of exploitation proceeds, nonrecourse loans are contingent or speculative obligations and are not treated as true debt. Durkin v. Commissioner, supra, 87 T.C. at 1376; Estate of Baron v. Commissioner, supra, 83 T.C. at 550-553. Once we have determined that the HGS partnership had an interest only in the exploitation receipts from the motion picture, one which was subject to a highly502 speculative acceptance by the general public, we must conclude that the nonrecourse debt does not reflect an actual investment in property, that it cannot be included in the taxpayers' depreciable basis, and that it must be disregarded for tax purposes unless and until paid. We reach the same conclusion as to the $ 58,333 nonrecourse obligation purportedly owed to Heritage. 29 See nn.8, 24, supra. Accordingly, because the value of the motion picture was insufficient to pay off the nonrecourse note and the other nonrecourse obligations and because payment of the nonrecourse note and other nonrecourse obligations was too contingent and speculative, we conclude that the nonrecourse note and other nonrecourse obligations are not properly included in the HGS partnership's basis. In view of our conclusion, petitioners' basis is limited to the amount of cash invested503 in the film by the partnership. This would be $ 116,667 ($ 50,000 + $ 33,333 + $ 33,334). Method of DepreciationIn this case the HGS partnership used the double-declining-balance method of calculating depreciation. Respondent changed the double- declining-balance method of calculating depreciation on the picture to the "income-forecast" method. Under section 446(b), respondent has "broad powers in determining whether accounting methods used by a taxpayer clearly reflect income." Commissioner v. Hansen, 360 U.S. 446">360 U.S. 446, 467 (1959). Respondent's authority under section 446(b) reaches not only overall methods of accounting, but also a taxpayer's method of accounting for specific items of income and expense. Sec. 1.446-1(a), Income Tax Regs.; Keller v. Commissioner, 725 F.2d 1173">725 F.2d 1173, 1179 (8th Cir. 1984), affg. 79 T.C. 7">79 T.C. 7 (1982); Grynbera v. Commissioner, 83 T.C. 255">83 T.C. 255, 267 (1984); Primo Pants Co. v. Commissioner, 78 T.C. 705">78 T.C. 705, 721 (1982). This Court cannot interfere with respondent's adjustments to a method of accounting under section 446(b) unless the adjustments are "clearly unlawful" or "plainly arbitrary. 504 " Thor Power Tool Co. v. Commissioner, 439 U.S. 522">439 U.S. 522, 532-533 (1979). Section 167(b) of the Code provides that the term "reasonable allowance" for depreciation shall include an allowance computed under the straight-line method, the declining-balance method at a rate not exceeding twice the straight-line rate, the sum-of-the-years-digits method, or any other method that does not, during the first two- thirds of the useful life of the property, produce total allowances that exceed the amount that would have been allowable under the declining-balance method. In the present case the double-declining-balance method utilized by the partnership resulted in the reported basis of the property, its stated cost of $ 1,047,000, being multiplied by a fraction, the numerator of which was two and the denominator of which was seven, representing a seven-year life for the property. For the first year this computation yielded an amount of $ 299,142. Petitioners claimed as depreciation one-twelfth of that amount in 1974, or $ 24,929, apparently reflecting the fact that they had held the property for only one full month during that year. In the second year petitioners multiplied their505 new adjusted basis of $ 1,022,071 times the two-sevenths fraction to yield an annual deduction of $ 292,020 for 1975. The process continued throughout the years in issue. In Revenue Ruling 60-358, 2 C.B. 68">1960-2 C.B. 68, as amplified by Revenue Ruling 64-273, 2 C.B. 62">1964-2 C.B. 62, respondent determined that methods of computing depreciation described in section 167(b) of the Code are in most cases inadequate when applied to motion picture films and similar properties because such methods result in a distortion of income. Revenue Ruling 60-358 states that the usefulness of such assets in the taxpayer's trade or business is measurable over the income it produces and cannot be adequately measured by the passage of time alone. Therefore, in order to avoid distortion of income, depreciation must follow "the flow of income." The Revenue Ruling holds that the income-forecast method of depreciation is an acceptable method for computing a reasonable allowance for depreciation on such property. The "income-forecast" method requires the application of a fraction, the numerator of which is the actual income from the film for the taxable year and the denominator of506 which is the forecasted or estimated total income to be derived from the film during its useful life. In this case an application of the "income-forecast" method would result in either no depreciation deduction or very little depreciation deduction because of the meager earnings of the film. In this case petitioners have failed to establish that the respondent's long-standing use of the income-forecast method produces a result that is either clearly unlawful or plainly arbitrary. Accordingly, we sustain respondent's adjustments requiring computation of depreciation under the income-forecast method to the extent that such deductions are otherwise allowable. Increased Interest Under Section 6621 Respondent's amendment to answer asserted additional interest on substantial underpayments attributable to tax motivated transactions, pursuant to section 6621(c).30 The increased interest provided by section 6621(c) is to be determined where respondent establishes that there is a "substantial underpayment" (an underpayment exceeding $ 1,000) in any taxable year "attributable to 1 or more tax motivated transactions." Tax motivated transactions include, in addition to those enumerated507 in section 6621(c)(3)(A), those which may be specified in regulations prescribed by the Secretary. Sec. 6621(c)(3)(B). Section 301.6621-2T A-4(1), Temp. Proced. & Admin. Regs., 49 Fed. Reg. 50391 (Dec. 28, 1984), includes as "deductions * * attributable to tax motivated transactions" the following: Any deduction disallowed for any period under section 183, relating to an activity engaged in by an individual or an S corporation that is not engaged in for profit * * . Section 301.6621-2T A-10, Temp. Proced. & Admin. Regs., 49 Fed. Reg. 50391 (Dec. 28, 1984), provides that the increased interest rate applies to interest accruing under that provision after December 31, 1984, regardless of the date prescribed for payment of the tax. This same provision states that a taxpayer may stop the running of the increased interest by posting a bond or cash payment in the amount of the508 tax liability and interest already accrued. Sec. 301.6621-2T A-11, Temp. Proced. & Admin. Regs. We have held that the partnership's activities in investing in "The Young Warlord" were not entered into with an actual and honest objective of making a profit as required by section 183. As a result, there are underpayments attributable to deductions claimed by petitioners in excess of the amounts permitted by section 183. Under the explicit terms of section 6621(c) and its accompanying regulations relating to tax motivated transactions, these underpayments, to the extent they exceed $ 1,000, constitute "substantial underpayments." The imposition of interest on substantial underpayments as proposed by respondent is therefore sustained. 31 See Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 422-423 (1988); Soriano v. Commissioner, supra, 90 T.C. at 62. *509 To reflect the foregoing, Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable years in question, and all "Rule" references are to the Tax Court Rules of Practice and Procedure.↩2. Respondent has conceded the addition to tax under section 6651(a) for petitioners Estate of Burton S. Brooks and Anita C. Brooks. Anita Mandel (formerly Anita C. Brooks) concedes the adjustment for taxes in the amount of $ 219 for her 1978 taxable year. Petitioners Horace J. and Edith K. Waldman concede the adjustment for Caddo Productions.↩3. Burton R. Horowitz, although not a petitioner in this case, took an active part in the proceedings, and agreed that the outcome of this litigation will be determinative of the outcome of his own tax liabilities as they relate to the HGS partnership. An agreement to be bound has been filed in his case, docket No. 16362-83. Edward N. Schwartz and his spouse were originally parties to this suit but settled their case before trial; an order was issued, severing them from this case and assigning them a separate docket number (docket No. 36726-84).↩4. Wellbrock testified that Ramwell, Inc. paid $ 875,000 for the movie, but at the time the HGS partnership acquired the movie, Wellbrock had supplied Green with a letter confirming that Ramwell, Inc. had paid $ 750,000. We accept the earlier written document as being more trustworthy than Wellbrock's memory many years later. ↩5. Both Steloff and Wellbrock failed to produce the sales contract and other documents, although subpoenaed to do so; their explanations for such failure were unsatisfactory. Wellbrock, for example, suggested to the Court that he had not retained a copy of his $ 625,000 nonrecourse note since he "owed" the money.↩6. Horowitz testified that, during the time he was considering whether to invest in "The Young Warlord," he was advised by one Bud Fillipo, who was allegedly knowledgeable about the film business. Fillipo, however, did not testify at the trial of this case, and there is no probative evidence as to his supposed expertise. The Court discounts much of Horowitz' testimony as so much self-serving puffery. The Court's evaluation of his testimony was reached by the Court's own observation of the witness, particularly on direct examination, and was not based on the fact that he is a disbarred lawyer, a fact later brought out on cross-examination and a fact much overemphasized in respondent's briefs.↩7. The investors later formed HGS Productions as a New Jersey general partnership on November 22, 1974. The partners were Horowitz, who had a 50-percent share of partnership profits and losses; Schwartz, who had a 16-2/3-percent share of profits and losses; Moritz, Waldman, and Green, who each had a 10-percent share; and Burton S. Brooks, who had a 3-1/3-percent share.↩8. Green was the bookkeeper who kept the books for HGS. At the trial of this case, he could not say whether or not Heritage actually made a cash payment of $ 58,333 to Ramwell, Inc. The Court is troubled by what appears to be a lot of circular movements of phantom cash, none of which is documented in the record. Ramwell, Inc. had just bought the film from Heritage for $ 125,000 in cash and a $ 625,000 nonrecourse note; there is no persuasive or probative evidence to establish that that $ 125,000 cash was ever paid to Heritage. Petitioners seem to argue that Wellbrock was just a broker flipping over the film for what amounted to a $ 50,000 broker's commission, presumably HGS's actual cash contribution. Steloff (or Heritage) needed help in the form of dollars, yet supposedly was lending $ 58,333 to HGS on a nonrecourse basis as part of HGS's supposed cash down payment. In the absence of documentation of the type that reasonable businessmen would normally maintain in the ordinary course of business to substantiate such cash payments, the Court is unwilling to assume that any such payments (the $ 125,000 and the $ 58,333) were actually made and concludes that there were phantom cash "payments" in this transaction.↩9. While Horowitz testified that these guarantees were intended as inducements to Steloff (or Heritage) to vigorously promote the film, this would hardly accomplish that goal. Heritage and Steloff were in need of dollars, and lack of funds is what caused their actual promotion efforts in 1974 to be so ineffectual. The Court is satisfied that the sole, exclusive and irrevocable nature of the distribution rights was the real reason for any such guarantees. Steloff was determined to retain control over the distribution of this film and to avoid a repetition of his earlier experience where one of his films got away from him and beyond his control. As indicated in the text below, petitioners subsequently loaned the money back to Heritage after it had purportedly paid part of the "guarantee."↩10. Although Heritage and HGS apparently contemplated some revision and further editing of the film both before and after the 1974 release, the record does not indicate the nature or scope of that process, nor are there any documents or other probative evidence establishing the cost of such further editing and/or extra filming.↩11. The Court accords little weight to these figures or to Steloff's "best guess," particularly in view of the pending litigation between HGS and Heritage that they were trying to settle at the time of this trial. These figures were generated in the course of or shortly after the trial of this case and were submitted to this Court by a supplemental stipulation and without further live testimony by Steloff. Steloff's affidavit reciting that "Heritage will pay HGS Productions the money it owes" is accorded little weight by this Court.↩12. While Horowitz testified that he would not permit the film to be lost (to HGS), the Court regards his testimony as so much self-serving puffery. The Court is satisfied the HGS partners never had any intention of paying this $ 1,400,000 principal and interest by December 31, 1984, nor any intention of paying that or any other amount by December 31, 1994, except out of exploitation proceeds. When and if such proceeds are realized and payments are actually made on the note, HGS will then acquire some additional equity and basis in "The Young Warlord" beyond the investors' cash-out-of-pocket payments.↩13. There appears to be a discrepancy between the gross receipts reported in 1975 by HGS and the producer's report provided HGS by Heritage. The record does contain a copy of a check from Heritage to HGS dated March 10, 1975, in the amount of $ 384.57. Assuming HGS reported the guarantee by Heritage of $ 30,295 in 1975, that would add up to gross receipts of $ 30,679.57 for 1975. It is unclear how HGS arrived at the $ 40,906 figure.↩14. For the years 1975, 1976, 1977, and 1978, some other items were disallowed by respondent with respect to petitioners Waldman. See n.2, supra↩. The above figures do not reflect disallowances other than those relating to HGS. We have assumed that the Waldmans were in the 50-percent bracket. 15. Tax benefit flowed from the cash payment of Estate of Burton S. Brooks, etc. The $ 827 tax deficiency also includes an adjustment for taxes in the amount of $ 219. See n.2, supra↩. 16. See n.15, supra↩.17. See also Akelis v. Commissioner, T.C. Memo. 1989-182; Estate of Canfield v. Commissioner, T.C. Memo. 1987-294; Jaros v. Commissioner, T.C. Memo. 1985-31; Burpee v. Commissioner, T.C. Memo. 1983-710↩.18. Section 183, in relevant part, provides: SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT. (a) General Rule. -- In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. (b) Deductions Allowable. -- In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed -- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1). (c) Activity Not Engaged in for Profit Defined. -- For purposes of this section, the term "activity not engaged in for profit" means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.↩19. See also Marshall v. Commissioner, T.C. Memo 1988-524">T.C. Memo. 1988-524; Zane v. Commissioner, T.C. Memo. 1988-392; Jenkins v. Commissioner, T.C. Memo. 1988-292↩.20. Respondent notes that this amount may include the $ 30,295 "guarantee" of Heritage to HGS, an amount which the partners then loaned back to Heritage in 1975 to keep it afloat. Although we are somewhat skeptical of this transaction, on this record, we see no basis for reducing the reported income by the "guarantee" amount. With respect to the other amounts that Heritage received but which were not reported or paid over to HGS, we believe that the financial status of Heritage was too precarious for those amounts to be deemed "income" to the HGS partnership. Also the record does not show exactly when Heritage received this $ 74,996.52, other than the period from January 1, 1977 through September 30, 1984. We do not accept Steloff's allocation of the amount (see n.11, supra↩), and there is no basis in the record for allocating any portion of the amount to the years before this Court. 21. See also Kaehn v. Commissioner, T.C. Memo. 1987-608; Williams v. Commissioner, T.C. Memo. 1987-308; Massengill v. Commissioner, T.C. Memo. 1986-159↩.22. These factors include: (1) The manner in which the taxpayer carries on the activity; (2) the expertise of the taxpayer or his advisors; (3) the time and effort expended by the taxpayer in carrying on the activity; (4) the expectation that assets used in the activity may appreciate in value; (5) the success of the taxpayer in carrying on similar or dissimilar activities; (6) the taxpayer's history of income or losses with respect to the activity; (7) the amount of occasional profits, if any, which are earned; (8) the financial status of the taxpayer; and (9) whether elements of personal pleasure or recreation are involved.↩23. See Burpee v. Commissioner, T.C. Memo. 1983-710↩.24. Wellbrock testified he received $ 175,000 in cash, but that clearly was incorrect. The purchase price was reduced to $ 1,047,000 and the nonrecourse note was $ 875,000, so at most only $ 172,000 was paid in cash. The HGS partners paid only $ 50,000 in cash and had no information as to whether or not Heritage actually advanced any money on their behalf. See n.8, supra↩. On this record, the Court is not persuaded that Heritage made any such $ 58,333 payment. As will be discussed in the text below, we conclude that petitioners in fact only paid cash totaling $ 116,667.25. Because of our holding as to the lack of profit objective, we need not consider whether the investment credits were otherwise properly claimed. We note, however, that notwithstanding petitioners' claims, there is nothing in the record that establishes that this motion picture qualified for investment tax credits under section 48(k). Initially, we note that it is settled that section 48(k) applies to the years in issue and is not unconstitutional. Fife v. Commissioner, 82 T.C. 1">82 T.C. 1 (1984). Moreover, there is nothing in this record to establish that the production costs of the motion picture were in fact United States production costs. See sec. 48(k)(5). In fact, we are satisfied that the production costs were not United States production costs. Additionally, we seriously doubt that the limited release of the motion picture in 1974 would have qualified as placing the motion picture in service in that year. See Isenberg v. Commissioner, T.C. Memo 1987-269">T.C. Memo. 1987-269. After that limited initial release, the motion picture was withdrawn from distribution for further editing and post-production work. On brief petitioners even argue that the videocassette of the film which all of the experts and the Court viewed (see n.27, infra↩) did not represent what would be shown in a theater. Petitioners argue that "the version shown in the theatres or on television would be a better edited final version than [the Court exhibit]." This suggests, if anything, that work still remains before this movie would be ready for theatrical distribution.26. See Estate of Canfield v. Commissioner, T.C. Memo. 1987-294↩. Also, at the time of the trial of this case, there was a lawsuit pending between Heritage and the HGS partnership, which the partners and Steloff were trying to settle.27. Petitioners offered into evidence a videocassette of the movie, the same one viewed by all of the experts in the case, and asked the Court to view the film. The Court has done so, and agrees with Madden's assessment. While the cast was excellent, these fine English actors were given little to do in this movie. The movie consisted of a string of disjointed episodes and battle scenes. There was little plot or character development. From its "jury view," the Court noted that, despite the grainy quality of the film, the handsome leading man, Oliver Tobias, and the costumes were pleasing to the eye.↩28. We note that in estimating a break-even point, Madden appeared to allow Heritage a 40 percent share of the box office receipts, or some $ 3.2 million ($ 8 million X 40 percent). Sherrill indicated that, in the motion picture industry, independent distributors generally receive only 25 percent of the actual box office receipts from the theater owners. The reason is that independent distributors have a difficult time getting theater owners to play their pictures. Thus, $ 12.96 million in box office receipts would be needed to yield film rentals to Heritage of $ 3.24 million, approximately the same net figure derived by Madden.↩29. To the extent, if any, that the $ 74,000 that Heritage has apparently failed to pay over to the HGS partnership can be properly charged against this nonrecourse $ 58,333 debt or against the $ 875,000 nonrecourse note, the partners may well acquire additional basis when and if this money is ever paid to HGS.↩30. The additional interest was originally asserted under section 6621(d), which was redesignated section 6621(c) by section 1511(c)(1)(A) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2744. All such references made herein are to the redesignated section.↩31. The section 183 profit-objective issue has been involved in this case from the outset, well before respondent's amendment to answer asserting increased interest under section 6621. The imposition of the addition to tax under section 6621 flows from our resolution of the section 183 issue. Therefore, we need not consider a valuation overstatement under section 6659(c) to support this increased interest rate.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620915/	Peterson Machine Tool, Inc., and its subsidiary, Kansas Instruments, Incorporated, et al., 1 Petitioners v. Commissioner of Internal Revenue, RespondentPeterson Machine Tool, Inc. v. CommissionerDocket Nos. 8607-80, 8980-80, 8981-80, 8982-80United States Tax Court79 T.C. 72; 1982 U.S. Tax Ct. LEXIS 67; 79 T.C. No. 4; July 14, 1982, Filed 67 Decisions will be entered under Rule 155. Buyer purchased the stock of KI from sellers. The contract of sale provided that the purchase price was paid for all of the stock of KIand for covenants not to compete. It further provided that the covenants were "materially significant and essential to the closing" and that the "covenants are a material portion of the purchase price." Held, "strong proof" doctrine not applicable where neither party seeks to vary the terms of the contract, but only to construe obviously ambiguous terms in light most favorable to their respective causes. Held, further, covenants not to compete were intended to be part of the contract, had independent economic significance, and a portion of the purchase price is allocable to them. Held, further, amount allocable to the covenants determined. Merrill R. Talpers, Glenn E. Bradford, and Ronald S. Bronstein, for the petitioners in docket No. 8607-80.Laurin W. Schutter, for the petitioners in docket Nos. 8980-80, 8981-80, and 8982-80.James E. Cannon, for the respondent. Forrester, Judge. FORRESTER73 In these consolidated cases, respondent has determined deficiencies in petitioners' Federal income taxes as follows:YearPetitionerDocket No.endingDeficiencyPeterson Machine Tool, Inc.,8607-808/31/76$ 22,997.00and its subsidiary,8/31/7711,154.00Kansas Instruments, Inc.Carl U. Hansen8982-8012/31/7517,950.00and Merida HansenM. V. Welch8980-8012/31/753,140.65and Lucy L. WelchRobert W. Moses8981-8012/31/752,515.00and Dixie L. MosesConcessions having been made, the only issue remaining for decision is whether any portion of the sale price of all of the corporate stock of Kansas Instruments, Inc., is properly allocable to covenants not to compete.FINDINGS OF FACTSome of the facts have been stipulated and are so found.Peterson Machine Tool, Inc. (hereinafter referred to as Peterson, 69 Inc.), is a Missouri corporation with its principal place of business, at the time its petition herein was filed, in Shawnee Mission, Kans. It filed U.S. Corporation Income Tax 74 Returns (Forms 1120) for the fiscal years ending August 31, 1976, and 1977, with the Internal Revenue Service Center in Austin, Tex. 2The individual petitioners in each docket number are husbands and wives who, at the time their petitions herein were filed, resided in the State of Kansas. They timely filed their joint Federal income tax returns for 1975 with the Internal Revenue Service Center in Austin, Tex.Peterson, Inc., has been engaged in the business of manufacturing and distributing equipment for the automobile engine rebuilding and reconditioning field since 1962. It also purchases certain products for resale in this field, particularly cleaning equipment. Peterson, Inc.'s president and controlling stockholder is D. 70 R. Peterson (hereinafter Peterson).Kansas Instruments, Inc. (hereinafter Instruments), is a Kansas corporation engaged in the manufacture, distribution, and sale of cleaning tanks and automobile rebuilding equipment.In 1969, Carl U. Hansen (hereinafter sometimes referred to as Hansen), a 59-year-old graduate mechanical and industrial engineer, purchased one-ninth of the stock of Instruments. 3 By 1971, most of the other owners of Instruments had been bought out by Hansen. With his technical expertise, Hansen assisted Instruments in various ways, including the design of its product line. He was never, however, a paid employee of Instruments.In 1970 or 1971, Robert W. Moses (hereinafter sometimes referred to as Moses), a graduate industrial engineer, who was then 1 year out of college, began to work for Instruments. He soon became its general manager, and was largely responsible for new71 products and improvements in old ones.By 1975, Instruments had gained significantly in financial success, having gone from a loss of approximately $ 8,500 in 1971 to a profit of approximately $ 30,000 in 1974. As of that time, Moses owned 18 percent of the stock of Instruments. He had primary knowledge and responsibility regarding design, 75 development, and function of Instruments' product line, its labor force, marketing and sales force, and its customer relations. He spent 40 to 60 hours per week on that corporation's affairs.At this time Hansen, then 65 years of age and owner of 71 percent of Instruments' stock, was only marginally involved in Instruments. While he was generally aware of the corporation's activities, and fully capable of performing any of the tasks of general manager, he usually went into the office only 1 day each week, and then only for 2 to 4 hours. Only rarely did he involve himself in customer relations and product concerns. He never received a salary from Instruments, nor did that corporation ever pay any dividends while he was a shareholder.In addition to Hansen and Moses, during 1975 there was a third shareholder in Instruments -- M. V. 72 Welch (hereinafter sometimes referred to as Welch). Welch owned 11 percent of that corporation's stock, but was not actively involved in its operations. He was 66 years of age and president and controlling stockholder of Welch Manufacturing Corp. Although Welch Manufacturing Corp. did not produce the same type of equipment as did Instruments, the machinery and tools used in its manufacturing processes were substantially similar to those used by Instruments in its business. Welch retired from active participation in his corporation in 1978.In early 1975, Peterson, Inc., first began to do business with Instruments. Peterson went to the latter's place of business and saw that it could make a cleaning tank needed in Peterson, Inc.'s product line. A few such tanks were ordered and delivered. Hansen and Moses delivered the products to Peterson, Inc., personally. Peterson, Hansen, and Moses then went to lunch, at which time Peterson asked Hansen if he would consider selling Instruments. Hansen's reply was "I'm not interested in selling it at the present time."Peterson's interest in acquiring Instruments stemmed from the fact that that corporation manufactured a revolutionary dishwasher-type73 cleaning machine which was then the only one of its kind in the United States and which was in great demand. Additionally, Instruments was a major competitor of Peterson, Inc., with regard to other products. Peterson believed 76 that the product lines of both companies would compliment each other, increasing sales of both.Approximately 6 weeks after Peterson's first inquiry into the purchase of Instruments, Hansen called Peterson on the phone to inform him of his interest in selling all of Instruments' stock for $ 280,000. Hansen's change of heart was a result of his age (65 years), his relative inactivity at the business, and his desire to retire and travel. Hansen had previously discussed the sale with Welch and Moses, who agreed to go along with Hansen's decision to sell all of Instruments' stock for $ 280,000.Negotiations ensued between Hansen and Peterson, lasting from approximately June 1975 through October 1975. The primary issue throughout the negotiations was price. Peterson made offers of $ 100,000, $ 150,000, and $ 250,000, each of which was rejected by Hansen, who would not waiver from his original price of $ 280,000. Peterson's increasing offers were made74 notwithstanding advice from the bank where Peterson, Inc., maintained a $ 650,000 line of credit, that Instruments was worth only $ 100,000 and, in the most favorable light, possibly as high as $ 180,000. This conclusion was based on book value ($ 90,000) and earnings ($ 30,000 in 1974) as shown on Instruments' financial statements for 1971 through 1974, and for the first 7 months of 1975.Finally, on October 29, 1975, Peterson agreed to Hansen's price of $ 280,000 because of his belief that the corporations would compliment each other so well. Based solely on Peterson, Inc.'s good credit, and not on Instruments' credit or its assets, the bank agreed to increase Peterson, Inc.'s line of credit to $ 750,000, and to loan that corporation the money to purchase Instruments' stock.At the meeting between Peterson and Hansen on October 29, 1975, the former agreed to pay $ 280,000 for Instruments' stock, and the parties shook hands on it. Prior to that handshake, there had been no discussion of a covenant not to compete as part of the transaction, but almost immediately thereafter (within 2 or 3 minutes), Peterson said "we want a covenant not to compete" and Hansen replied "we will give75 you one." Shortly thereafter Hansen told Moses that Peterson wanted a covenant not to compete and an employment contract from Moses, to which Moses agreed.77 On or about November 24, 1975, Peterson, Inc.'s accountants submitted a list of representations for verification to Instruments, and Hansen signed the list as president of Instruments. This instrument also confirmed the agreement reached between the parties:15. An agreement was reached on October 29, 1975, for the Company to sell all of the issued and outstanding corporate shares of Kansas Instruments, Inc., for $ 280,000. The final closing will be December 11, 1975. If the purchase is consummated on this date, it will be effective as of the close of business on October 31, 1975.On December 4, 1975, Hansen, Moses, and Welch (sometimes hereinafter collectively referred to as the sellers) met with Peterson, Merrill R. Talpers (Peterson, Inc.'s attorney -- a tax specialist -- hereinafter referred to as Talpers), and Robert C. Anderson (Peterson, Inc.'s accountant, hereinafter referred to as Anderson) in the office of the sellers' attorney, David Heilman (hereinafter Heilman). To that meeting, Talpers brought several76 copies of a draft contract of sale for review by all of the persons involved. The draft was read by the sellers, discussed in private with Heilman, and changes were made. This draft included, inter alia, the following paragraphs:It is therefore agreed:1. Sale of corporate shares. For the total purchase price of $ 280,000.00, each of the Sellers shall (1) sell to the Buyer the number of shares of the Company set forth below opposite his name effective the close of business on October 31, 1975, and (2) execute the covenant not to compete as set forth in numbered paragraph 11 of this Agreement:SellerShares to be soldCarl U. Hansen1,495Robert W. Moses385Bud Welch240and the Buyer, in reliance on the representations, covenants and warranties of the Sellers contained herein and subject to the terms and conditions of this agreement, shall purchase such shares from the Sellers, respectively, at such purchase price.* * * 11. Covenants not to compete. Each Seller agrees to execute a covenant not to compete which will state that, from and after the closing, he will not, unless acting as an officer or employee of the Company, or with the Buyer's prior77 written consent, directly or indirectly own, manage, operate, join, control, or participate in, or be connected as an officer, employee, partner, or otherwise with, any business under any name similar to the Company's 78 name, and that, for a period of five years after the closing, he will not in any such manner directly or indirectly compete with, or become interested in any competitor of, the Company. The Sellers acknowledge that the remedy at law for any breach by either of them of such covenants not to compete will be inadequate, and that the Company and the Buyer shall be entitled to injunctive relief. It is the intention of the Sellers and the Buyer that the execution of these covenants not to compete be considered as materially significant and essential to the closing as set forth in numbered paragraph 2 of this Agreement and that such covenants are a material portion of the purchase price set forth hereinabove.The above paragraphs were both read and understood by the sellers; however, no specific discussion of them took place. Heilman's copy of the draft indicated that the sellers had no questions regarding the covenant not to compete language and that they did not78 disagree with the provisions.On December 11, 1975, Peterson, for Peterson, Inc., and the sellers closed the transaction, signing the final revised contract, and money changed hands. The revised contract, in relevant part, provided:It is therefore agreed:1. Sale of corporate shares. For the total purchase price of $ 280,000.00, each of the Sellers shall (1) sell to the Buyer the number of shares of the Company set forth below opposite his name effective the close of business on October 31, 1975, and (2) execute the covenant not to compete as set forth in numbered paragraph 12 of this Agreement:SellerShares to be soldCarl U. Hansen1,495Robert W. Moses835M. V. Welch240and the buyer, in reliance on the representations, covenants and warranties of the Sellers contained herein and subject to the terms and conditions of this agreement, shall purchase such shares from the Sellers, respectively, at such purchase price.* * * 12. Covenants not to compete. Each Seller agrees to execute a covenant not to compete which will state that, from and after the closing, he will not, unless acting as an officer or employee of the Company, or with the Buyer's79 prior written consent, directly or indirectly own, manage, operate, join, control, or participate in, or be connected as an officer, employee, partner, or otherwise with, any business directly or indirectly which competes with the products, or otherwise with the Company for a period of five years after the closing. The Sellers acknowledge that the remedy at law for any breach by either of them of such covenants not to compete will be inadequate, and that the Company and the Buyer shall be entitled to injunctive relief. It is the intention of the Sellers and the Buyer that the execution of these covenants 79 not to compete be considered as materially significant and essential to the closing as set forth in numbered paragraph 2 of this Agreement and that such covenants are a material portion of the purchase price set forth hereinabove.Also, on that date, each of the sellers signed a separate covenant not to compete which referred to paragraph 12 of the contract. Its provisions were almost identical to those of the sale contract. 480 At no time from the commencement of negotiations through the closing of the contract of sale were there discussions regarding any allocations of specific amounts of the purchase price of the stock to the covenants not to compete. Notwithstanding, Peterson considered the covenants to be a significant factor in the purchase agreement. He would not have purchased the stock of Instruments without them, and he believed that one-third of the contract price was allocable thereto. While the sellers believed that the covenants were important to Peterson, they were not aware that any allocations of the purchase price would be made.On Peterson, Inc.'s Federal corporate income tax return for its year ending August 31, 1976, it allocated $ 100,000 to the covenants not to compete, to be amortized over the 5-year life of the covenants. 5 Richard Jungck, a certified public accountant with a law degree who specialized in taxation, advised Peterson, Inc., with regard to the allocation. Relying on Rev. Rul. 68-609, 2 C.B. 327">1968-2 C.B. 327, concerning the determination of 80 the fair market value of intangible assets of a business, he concluded the proper81 allocation to be $ 100,000.The sellers did not allocate any portion of the contract price to the covenants not to compete. They did not become aware of Peterson, Inc.'s allocation to the covenant until late 1978 when an Internal Revenue Service inquiry revealed inconsistent treatment in the allocation to the covenant. 682 The respondent has taken inconsistent positions, determining deficiencies against each of the sellers and against Peterson, Inc. With respect to the sellers, respondent has determined that $ 100,000 of the aggregate sale price is allocable to the covenants not to compete and thus taxable as ordinary income. As regards Peterson, Inc., respondent has disallowed the claimed deductions for amortization of the covenants not to compete for its fiscal years ending August 31, 1976, and August 31, 1977.OPINIONThe issue to be decided is what portion, if any, of the $ 280,000 purchase price of Instruments is properly allocable to the covenants not to compete. Both the sellers and Peterson, Inc., have a substantial interest in the determination of this issue. To the extent an amount was paid by Peterson, Inc., for the covenants not to compete, it has purchased intangible assets amortizable over the 5-year lives ( sec. 1.167(a)-3, Income Tax Regs.), and the sellers must recognize ordinary income for their forbearance to compete. Major v. Commissioner, 76 T.C. 239">76 T.C. 239, 245 (1981); Lazisky v. Commissioner, 72 T.C. 495">72 T.C. 495, 500 (1979). Alternatively, 83 to the extent Peterson, Inc., paid for stock and/or goodwill (nonwasting assets), it has purchased nonamortizable assets, the sale of which by the sellers generates only capital gain income to them. Major v. Commissioner, supra; Lazisky v. Commissioner, supra.The sellers contend that no amount is allocable to the covenants because the contract of sale provides for no allocation thereto, the parties did not intend for an allocation to be made, and any such allocation would lack economic reality. 81 Conversely, Peterson, Inc., maintains that an allocation of $ 100,000 to the covenants is appropriate because the contract of sale, while not specifying a precise amount, provided for some allocation, the convenants had real economic value, and the covenants were bargained for in the course of the sale.Respondent, as a stakeholder, has taken inconsistent positions, assessing deficiencies against both Peterson, Inc., and the sellers. At trial respondent did not indicate a preference as to whether the sellers or Peterson, Inc., should prevail; however, on brief respondent strongly advocates the sellers' position. In 84 fact, he did not argue alternative liability of the parties, but merely seeks that his determination be sustained in full against Peterson, Inc., and be overruled in full in favor of the sellers. 7In cases such as the one at bar, involving allocations to covenants not to compete, the respective petitioners each bear the burden of proving that respondent's determination as to them is erroneous. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Wilmot Fleming Engineering Co. v. Commissioner, 65 T.C. 847">65 T.C. 847 (1976); Rule 142(a), Tax Court Rules of Practice and Procedure.This Court has long held that where a taxpayer has entered85 into an agreement that includes specific terms, the tax consequences of which are in issue, "strong proof" must be adduced by the taxpayer seeking to establish a position at variance to the language of the agreement. Major v. Commissioner, 76 T.C. 239">76 T.C. 239, 247 (1981); Lucas v. Commissioner, 58 T.C. 1022">58 T.C. 1022, 1032 (1972). There are two primary elements to which this burden of proof relates. It must be established that the covenants in issue were actually intended as part of the contract and also that the covenants had independent economic significance such that we might conclude that they were a separately bargained-for element of the agreement. Major v. Commissioner, supra;Lazisky v. Commissioner, 72 T.C. 495">72 T.C. 495 (1979); Lucas v. Commissioner, supra.The sellers herein contend that Peterson, Inc., bears the burden of "strong proof" since it is expressly attempting to 82 alter the terms of the written contract by assigning a value to the covenants not to compete where none had been provided in the agreement. Both respondent and Peterson, 86 Inc., assert that the "strong proof" doctrine is inapplicable herein because none of the parties are attempting to vary the terms of this contract as written, but merely to construe the terms. We agree with respondent and Peterson, Inc.The terms of the contract are clear and there is little question that the language thereof contemplates an allocation to the covenants. Not only does the contract specify that the sale price of $ 280,000 is paid both for each seller's shares of Instruments and for their covenants not to compete, but the language of the paragraph concerning said covenants is exceedingly strong:It is the intention of the Sellers and the Buyer that the execution of these covenants not to compete be considered as materially significant and essential to the closing as set forth in numbered paragraph 2 of this Agreement and that such covenants are a material portion of the purchase price set forth hereinabove. [Emphasis supplied.]Thus, while it is unclear from the contractual terms what specific amount should be allocated to the covenants not to compete, some allocation is surely provided for. Under these circumstances, application of the "strong proof" doctrine87 is inappropriate. Compare Kinney v. Commissioner, 58 T.C. 1038">58 T.C. 1038 (1972). 8 Neither party seeks to vary the terms of the contract. They both merely attempt to construe an obviously ambiguous term of the contract in a light most favorable to their respective causes. This being the case, both Peterson, Inc., and the sellers bear the burden of proving that their respective interpretations of the words "material portion" and "materially significant" are correct by a mere preponderance of the evidence. See Kinney v. Commissioner, supra at 1043. See also Major v. Commissioner, 76 T.C. at 247 n. 6. Moreover, we note that in view of the fact that both the buyer and the sellers are parties to this proceeding, there is even less reason to apply the "strong proof" rule. Cf. Freeport Transport, Inc. v. Commissioner, 63 T.C. 107">63 T.C. 107 (1974), and particularly the concurring opinion of Judge Dawson at pages 116-117.88 83 We shall first address whether the parties to the contract intended an allocation of the purchase price to the covenants not to compete. For the following reasons, we believe such an allocation was intended.First, while the discussion of covenants not to compete was not part of the negotiation leading up to the "handshake" between Hansen and Peterson on October 29, 1975, immediately thereafter Peterson demanded covenants not to compete, and Hansen agreed. Through the entire meeting on that date, the only terms of the sale which were discussed between the parties were price, method of payment, and covenants not to compete. It is very clear from the record that Peterson considered the covenants an important part of the contract, and the sellers were aware of that fact.Second, the written contract specifically states that the parties intend the covenants to be "materially significant and essential to the closing" and they intend the covenants to be a "material portion of the purchase price." We find this the most persuasive evidence of what the parties actually intended. See Major v. Commissioner, supra at 250; Rich Hill Insurance Agency, Inc. v. Commissioner, 58 T.C. 610">58 T.C. 610 (1972);89 Annabelle Candy Co. v. Commissioner, 314 F.2d 1">314 F.2d 1 (9th Cir. 1962). Each of the sellers testified that he read the contract of sale in its entirety, and that if he disagreed with a provision, he spoke up. None of them made any comment regarding the language relating to the covenants. Each seller signed the contract aware of its contents. Mr. Hansen testified that he understood the word "material" in the covenant clause to mean some object, such as a piece of wood, steel, or paper, and that he knew of no other connotations for that word. We find such testimony from a college professor, having both a bachelor's and a master's degree, to be entirely incredible. Mr. Welch specifically testified that he considered the covenants a "significant and important part [of the contract] to Mr. Peterson."Finally, each of the sellers testified that he intended the sale to yield him only capital gain income. This, however, is not the intent at issue. What is important in the facts herein is whether the sellers intended that the covenants actually be a part of the agreement (i.e., whether Peterson, Inc., slipped the covenants into the contract without their knowledge). 90 The 84 facts unquestionably show that the sellers were aware of the terms. Moreover, the sellers were represented by counsel who read the contract and approved of its contents. That the sellers and/or their counsel did not intend, and were not aware of, the tax consequences of the disputed language is not significant. As stated in Hamlin's Trust v. Commissioner, 209 F.2d 761">209 F.2d 761, 765 (10th Cir. 1954), affg. 19 T.C. 718">19 T.C. 718 (1953):It is true that there was very little discussion of the suggested allocation. But the effectiveness taxwise of an agreement is not measured by the amount of preliminary discussion had respecting it. It is enough if parties understand the contract and understandingly enter into it. The proposed change in the contract was clear. All parties participating in the conference agreed to it. The owners of stock present signed the written contract at the time and others signed it later. It is reasonably clear that the sellers failed to give consideration to the tax consequences of the provision, but where parties enter into an agreement with a clear understanding of its substance and content,91 they cannot be heard to say later that they overlooked possible tax consequences. While acting at arm's length and understandingly, the taxpayers agreed without condition or qualification that the money received should be on the basis of $ 150 per share for the stock and $ 50 per share for the agreement not to compete. Having thus agreed, the taxpayers are not at liberty to say that such was not the substance and reality of the transaction. * * * [Emphasis supplied.]We next must consider whether the allocation by Peterson, Inc., of $ 100,000 to the covenants not to compete had independent economic significance (comported with economic reality).Hansen had been involved in Instruments for only 6 years as of the time of the sale of its stock to Peterson, Inc. In that relatively short time, he had turned the corporation around financially; from a loss of $ 8,500 in 1971, to a profit of $ 30,000 in 1974. On the other hand, he was 65 years of age in 1975, intended to retire, and he was only marginally active in the business. Yet he was aware of all of the activities of Instruments and extremely capable physically and mentally to compete with Peterson, Inc. He stated at the time92 of trial (June 1981);This may sound vain, but if it is made out of metal and can be dampened or welded together or shaped or machined or punch holes in it or anything like that, I'm probably capable of doing it. I have got a vast amount of knowledge back of me. I don't know -- I wouldn't know where to limit it to what I can't do.Additionally, with his approximately 71-percent share of the 85 $ 280,000 proceeds of sale of Instruments' stock, Hansen had the financial resources to compete if he changed his mind about retirement.Welch, while not active in Instruments' business, had the machinery and tools ready at his disposal through Welch Manufacturing Corp. to produce the same products as Instruments. Despite his age (66 years in 1975) and inactivity in Instruments, he was a potential competitive threat.Moses was also a competitive threat by virtue of his vast knowledge of Instruments' product development and design, its labor and sales forces, and its customers. The fact that Moses signed an employment contract with Peterson, Inc., for the duration of his covenant not to compete is entitled to weight, but is not determinative. Maseeh v. Commissioner, 52 T.C. 18">52 T.C. 18, 23 (1969).93 There was always the possibility that Moses or Peterson, Inc., could breach the employment contract or that Moses could be terminated for cause. In either case he could, absent a covenant not to compete, have engaged in competition. Furthermore, the fact that the employment contract contained its own restrictive covenant is of no moment since Moses testified that the employment contract and covenant not to compete were both part and parcel of the stock-sale transaction.Most telling of all evidence regarding the risk of competition by the sellers is Moses' admission at trial that with Welch's plant and equipment, the knowledge and abilities of Moses and Hansen, the members of Instruments' sales force who could be lured away from Instruments, and the sellers' capital, they could have, absent the covenants not to compete, started all over again with minimal expense or delay. Additionally, all sellers were then in good health. Surely these facts created a significantly high risk of competition from Peterson, Inc.'s point of view -- a risk which it would reasonably pay a substantial price to avoid.As for the amount of Peterson, Inc.'s allocation to the covenants not to compete of94 $ 100,000, we note that the book value of Instruments' assets was $ 90,000. Moses' testimony indicated that the fair market value of these assets could have been at most $ 160,000. Assuming this to be the case, it leaves at the very least $ 120,000 to be allocated between goodwill and the covenants not to compete. Little evidence was presented 86 regarding the goodwill of Instruments. Moses testified that the reputation of Instruments was not a big aspect of that corporation's sales of its products -- a fact that tends to diminish the value of goodwill. On the other hand, Instruments' profits had been steadily increasing since 1971 -- a factor indicating the existence of goodwill.While we disagree with Talpers, the draftsman of the contract of sale, that "material portion" necessarily means more than one-half, it certainly refers to something in excess of a nominal amount. The allocation originally chosen by Peterson, Inc. -- $ 100,000 -- represents approximately 35.7 percent of the purchase price of $ 280,000. 9 In light of all the facts presented, we think this allocation is too high and, on the basis of the entire record, hold that $ 70,000 is the appropriate allocation95 to the covenants not to compete. Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930).Accordingly,Decisions will be entered under Rule 155. Footnotes1. Cases of the following petitioners are consolidated herewith: M. V. Welch and Lucy L. Welch, docket No. 8980-80; Robert W. Moses and Dixie L. Moses, docket No. 8981-80; and Carl U. Hansen and Merida Hansen, docket No. 8982-80.↩2. On Nov. 20, 1979, Peterson, Inc., filed amended returns (Forms 1120X) for the fiscal years in issue.↩3. Hansen was, from 1957 through 1976, a full-time teacher in the industrial engineering department at Kansas State University.↩4. On Nov. 7, 1975, and as part of the sale transaction, Moses entered into an employment with Instruments whereby he agreed, inter alia, to employment at that corporation for a period of 5 years as its general manager. That contract contained its own restrictive covenant as follows:"12. Restrictive Covenant↩. During the term of this Agreement and for a period of five (5) years after the termination of this Agreement, for whatever reason, Moses will not, within a radius of fifty (50) miles from any place in the United States where the Employer does business or where products are manufactured or sold by the Employer, directly or indirectly, own, manage, operate, control, be employed by, participate in, or be connected in any manner with the ownership, management, or control of any business similar to the type of business conducted by the Employer at the time of the termination of this Agreement."5. On Nov. 20, 1979, Peterson, Inc., filed amended returns (Forms 1120X) for the fiscal years ending Aug. 31, 1976, and Aug. 31, 1977, increasing its allocation to the covenants to $ 181,691, and seeking respective refunds of $ 6,535 and $ 7,842. In its petition herein, Peterson, Inc., reiterated its contention that the larger figure represents the correct allocation to the covenant, but on brief it has reverted to the $ 100,000 figure.↩6. Moses first learned of Peterson, Inc.'s allocation of $ 100,000 to the covenant not to compete at a board of directors meeting of that firm, but he remained unaware of the tax consequences of such an allocation until notified by the Internal Revenue Service.↩7. Notwithstanding respondent's failure to argue in the alternative on brief, and his apparent concession of his determination against the sellers, we shall assume that no concession was intended and that to the extent part of the purchase price is allocable to the covenants not to compete, the sellers' proposed deficiency should be sustained.↩8. See also Miller v. Commissioner, T.C. Memo. 1964-305↩.9. Respondent alleges that Rev. Rul. 68-609, 2 C.B. 327">1968-2 C.B. 327↩, which was used by Peterson, Inc.'s accountant to value the covenants not to compete, is not an appropriate valuation method for such covenants. We need not, and thus do not, decide that issue herein.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620916/	HUNT PRODUCTION COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hunt Production Co. v. CommissionerDocket No. 81341.United States Board of Tax Appeals38 B.T.A. 457; 1938 BTA LEXIS 866; September 2, 1938, Promulgated 866 1. Where petitioner sold and assigned an oil and gas lease in consideration for a contract for future payments our of oil if, as, and when produced, held, that respondent erred in including the value of such oil payment contract in petitioner's income as a profit realized in the taxable year. 2. Where petitioner paid an annual franchise tax imposed under the laws of Texas as a tax, held, that respondent erred in disallowing the amount so paid as a deduction, under section 23(c) of the Revenue Act of 1932, for taxes paid. 3. Held, that the respondent erred in deducting from petitioner's gross income from certain oil properties, the amount of its intangible drilling and development costs, for the purpose of applying the statutory limitation of 50 percent of the net income from such, properties, to allowable depletion. 4. Where petitioner duly exercised its option to deduct its intangible drilling and development costs from its current gross income as an expense, rather than to charge same to its capital account, held, that the respondent did not err in his allowance of such deduction, notwithstanding such costs are not deductible from petitioner's gross867 income from its oil properties for the purpose of applying the statutory limitation of 50 percent of the net income from such properties, to allowable depletion. George H. Abbott, C.P.A. and J. B. McEntire, Esq., for the petitioner. John H. Pigg, Esq., for the respondent. TYSON 458 OPINION. TYSON: This is a proceeding for the redetermination of a deficiency in income tax for the year 1932 in the amount of $22,810.96. The petitioner alleges that the respondent erred (1) in including in petitioner's gross income the amount of $5,000 as profit derived from the sale of the Joe Lee "D" Lease; (2) in including in that income the amount of $1,317.05 as profit derived from certain contingent interest contracts not completed in the taxable year; (3) in failing to allow $5,781.29 as a deduction from petitioner's gross income for depletion based upon oil bonus received by petitioner; (4) in failing to allow a deduction from petitioner's gross income of $3,462.50 for taxes paid; (5) in including in petitioner's gross income the amount of $118,584.52, received by the transferor of certain oil and gas leases from the production of oil from such868 leases subsequent to the transfer of the leases to petitioner; and (6) in deducting from the gross income of petitioner's oil and gas producing properties intangible drilling and development costs in the amount of $223,035.11 to ascertain the net income from such properties for the purpose of applying the 50 percent limitation provided by section 114(b)(3) of the Revenue Act of 1932. By amended answer, filed at the hearing, respondent claims an increased deficiency on the ground that he erroneously allowed $223,035.11 as a deduction from the current gross income of petitioner if that amount may not be included in the deductions from gross income from the oil properties in determining the net income from such properties for the purpose of applying the 50 percent limitation in respect of the allowable deduction for depletion within the meaning of section 114(b)(3), supra.All the facts have been stipulated and the stipulation and exhibits attached thereto are included herein by reference. Only such of those facts as are deemed necessary to decision will be set out herein. 459 During the year 1932 the petitioner assigned the Joe Lee "D" Lease, which cost it nothing, 869 for a stated consideration of $10,000 to be paid out of the oil and gas when, as, and if produced from the leased lands. During 1932 petitioner collected nothing from the lease and reported no income therefrom in its income tax return for that year, but respondent valued the oil payment contract at $5,000 and included that amount in the income of petitioner. Respondent, in his deficiency notice, increased the profit of petitioner from certain contingent interest contracts not completed in the taxable year by the amount of $1,317.05. During the year 1932 petitioner received $21,022.88 as oil bonuses, or advance royalties, from leases assigned by it to others. Respondent did not allow any depletion in respect of that amount. Incident to incorporation in 1932, petitioner paid in that year to the State of Texas the amount of $962.50 as a franchise tax, which had accrued in that year, and the amount of $2,500 for its charter. The books and records of petitioner were kept and its income tax returns made on the accrual basis. The petitioner was organized on May 28, 1932, and began business on June 1, 1932, by the acquisition, in exchange for all its capital stock, of the net870 assets and business of H. L. Hunt, trustee, a copartnership. Included in those assets were numerous oil and gas leases on lands situated in Rush and Smith Counties, Texas, which the partnership had proviously acquired on November 26, 1930, from the lessees C. M. Joiner, Trustee, and C. M. Joiner, individually, the lessees hereinafter being referred to as Joiner. Two of the assignments by Joiner in the partnership provided for the payment to Joiner of certain amounts in cash and the other assignment provided also for the payment of an amount in cash and a further amount as evidenced by four promissory notes. All assignments provided for the payment to Joiner of further amounts out of the proceeds of the sales in certain specified percentages of oil if and when produced, saved, and marketed from the lands embraced in the leases. The assignments further provided that the assignee should "deliver to the credit" of Joiner "in the pipe line to which" the lease would be connected "the undivided portion of said oil produced and saved belonging to the party of the first part under the terms hereof and the party of the first part shall apply the proceeds of the sales thereof as a credit871 on the deferred payments as herein set out". Joiner was the party of the first part. There was no assumption by the assignee of personal liability for the amount, or any portion thereof, which was to be paid out of the proceeds of the oil produced, saved, and marketed. Under these assignments the purchasers of the oil produced, saved, and marketed from the properties covered by the leases paid, in 1932, to the parties 460 from whom the petitioner had acquired the leases, Joiner, or their predecessors in title, the sum of $118,584.52, which was the shares of those parties in the proceeds from the sale of oil produced, saved and marketed from the lands embraced in the leases. In its income tax return for 1932 the petitioner did not include the $118,584.52 in its income, but respondent included it therein in his determination of the deficiency herein and allowed a deduction for depletion thereon. The petitioner expended $223,035.11 on its oil-producing properties during 1932 in intangible drilling and development costs. Pursuant to the policy adopted by it in the taxable year these costs were charged off petitioner's books and deducted as expenses from its gross income872 in its return for 1932. In determining petitioner's income come for 1932 respondent allowed such deduction. Nothing embraced in such costs had any salvage value. In determining the net income of petitioner from its oil properties for the purpose of applying 50 percent thereof as a limitation upon allowable depletion, under section 114(b)(3), supra, respondent deducted the $223,035.11 intangible drilling and development costs from the gross income from such properties. The decision as to whether or not respondent erred in including in petitioner's income the amount of $5,000 as profit derived from the sale of the Joe Lee "D" Lease is controlled by the cases of Edwards Drilling Co.,35 B.T.A. 341">35 B.T.A. 341; affd., 95 Fed.(2d) 719; Willis R. Dearing,36 B.T.A. 843">36 B.T.A. 843; Cook Drilling Co.,38 B.T.A. 291">38 B.T.A. 291, and authorities cited therein. Following these authorities, we hold that the respondent erred in including in petitioner's gross income the $5,000 as profit from the sale of the Joe Lee "D" Lease. As to its second assignment of error it is conceded by stipulation and on brief by petitioner that its gross income should include873 the amount of $1,317.05 as profit derived from certain contingent interest contracts not completed in the taxable year, as determined by respondent, and in addition the further amount of $668.07. Consequently, we so hold. The failure of respondent to allow any deduction for depletion based upon oil bonuses, or additional royalties, received by petitioner in the amount of $21,022.88 from leases assigned by it to others was in error. We so hold, under authority of Palmer v. Bender,287 U.S. 551">287 U.S. 551, and cases therein cited. Respondent, on brief, apparently abandons contest on this issue, since he states therein that "In view of the decision * * in the case of Commissioner v. Fleming, 82 Fed.(2d) 324, the respondent sees no useful purpose will be served by briefing this issue." Included in the deduction from petitioner's gross income of $3,462.50 for taxes paid, which was disallowed by respondent, was the item of $2,500 paid the State of Texas for its charter and the item 461 of $962.50 paid that state as franchise tax. Petitioner, on brief, waived its claim for the deduction of the $2,500 charter cost, but adhered to its claim874 for deduction of the $962.50 franchise tax. The statute laws of Texas impose on every corporation authorized to do business in that state, with certain exceptions immaterial here, an annual franchise tax payable in advance on or before May 1 of each year, or if the corporation is organized after May 1 of any year a certain proportion of the amount of the annual tax to cover the period intervening between the time of its organization and the following May 1; the amount of the annual tax being based upon a certain proportion of the corporation's outstanding capital stock, surplus, and undivided profits, plus the amount of its outstanding bonds, notes and debentures, etc. We are of the opinion, and so hold, that the $962.50 paid as a franchise tax by petitioner was allowable as a deduction from its gross income. This amount accrued and was paid during the taxable year to the State of Texas as a tax and comes within the general provision of section 23(c) of the Revenue Act of 1932 and is not embraced in any of the exceptions to that general provision. 1875 Kossar & Co.,16 B.T.A. 952">16 B.T.A. 952. Cf. Jamestown Worsted Mills,1 B.T.A. 659">1 B.T.A. 659; Petaluma & Santa Rosa Railroad Co.,11 B.T.A. 541">11 B.T.A. 541; Holeproof Hosiery Co.,11 B.T.A. 547">11 B.T.A. 547; United States Trust Co. of New York,13 B.T.A. 1074">13 B.T.A. 1074; and United Carbon Co.,32 B.T.A. 1000">32 B.T.A. 1000, reversed on another point. The inclusion by respondent in petitioner's income of the amount of $118,584.52 received by petitioner's transferors from the production and sale of oil from the leased premises was in error and is disapproved. The question is clearly controlled by the case of Thomas v. Perkins,301 U.S. 655">301 U.S. 655, and is so conceded to be by respondent on brief. See also Rocky Mountain Oil Co.,36 B.T.A. 365">36 B.T.A. 365; I. Rudman,36 B.T.A. 803">36 B.T.A. 803. As shown above, the respondent, in his determination of the net income from the oil properties, for the purpose of applying a 50876 percent limitation thereon as the allowable depletion, deducted from the gross income from those properties the amount of $223,035.11 expended on them by petitioner as intangible drilling and development costs. The point presented by these facts needs no extended discussion since decision thereon is clearly controlled by the holdings in the following cases: Ambassador Petroleum Co. v. Commissioner, 81 Fed.(2d) 474, reversing on this point Ambassador Petroleum Co.,28 B.T.A. 868">28 B.T.A. 868; Commissioner v. Wilshire Oil Co., 95 Fed.(2d) 971, affirming Wilshire Oil Co.,35 B.T.A. 450">35 B.T.A. 450; Rocky Mountain Oil Co.,462 supra; I. Rudman, supra; and Ralph W. Crews,37 B.T.A. 387">37 B.T.A. 387. Upon the authority of these cases we hold that the respondent erred in deducting from the gross income of the oil properties the intangible drilling and development costs of $223,035.11 for the purpose of applying the limitation of 50 percent of the net income from such properties to allowable depletion. In support of the affirmative allegations of his amended answer, respondent contends877 that if the Board, as it has, should hold herein that the intangible drilling and development costs of $223,035.11 are not deductible from the gross income from the oil properties in determining the net income from those properties for the purpose of applying the 50 percent of such income as a limitation on allowable depletion as provided in section 114(b)(3), supra, that then such amount should not be allowed as a deduction from the gross income of petitioner in determining its taxable net income. This contention invokes violation of respondent's own regulation, article 236, Regulations 77, 2 in force during the taxable year. Regulations on the same subject, substantially the same in substance so far as the question here involved is concerned, have been in effect under the Revenue Acts of 1926 and 1928 and have received legislative sanction by repeated reenactments of substantially the same provisions in the various acts to which the regulations apply. These regulations expressly give the taxpayer the option to deduct such intangible drilling and development costs from his gross income as an expense or to charge same to capital account. 878 The petitioner exercised this option in the taxable year in which it began business by electing to deduct such costs from its gross income rather than to charge same to its capital account. Such election remained binding on petitioner for all subsequent year. That the amount of $223,035.11 expended for intangible drilling and development costs on its oil properties is an allowable deduction from the gross income of petitioner under respondent's current regulation is clear; and this is true notwithstanding that the amount of such expenditure is not to be deducted from the gross income from these properties in determining the net income therefrom for the purpose of applying the 50 percent limitation on allowable depletion. Cf. I. Rudman, supra.879 This would not be improper as resulting in a double deduction, since the matter of depletion allowance under section 114(b)(3), 463 supra, is separate and distinct from the matter of deduction from the gross income to determine taxable net income under section 23(1), Revenue Act of 1932 3; one being the determination of the allowance for depletion and the other being the determination of taxable net income, which "are approached by the taxing statutes from entirely different angles". Cf. Ambassador Petroleum Co. v. Commissioner, supra, concurring opinion; Mountain Producers Corporation v. Commissioner, 92 Fed.(2d) 78-80; Commissioner v. Wilshire, supra.880 When Congress enacted section 23(1), supra, under which, in accordance with the respondent's regulations of long standing, the taxpayer had the right to, by election, deduct intangible drilling and development costs from gross income in determining taxable net income, it knew the taxpayer also had the right, under section 114(b)(3), supra, simultaneously enacted, to have such costs included in the net income from the oil properties for depletion purposes, and it is clear that in enacting the two sections Congress intended to and did confer both rights upon the taxpayer. Cf. Commissioner v. Wilshire, supra.We hold that the Commissioner did not err, as claimed by his amended answer, in his allowance of the deduction of $223,035.11 from the current gross income of petitioner. Decision will be entered under Rule 50.Footnotes1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (c) TAXES GENERALLY. - Taxes paid or accrued within the taxable year, except - * * * ↩2. ART. 236. Charges to capital and to expense in the case of oil and gas wells. - (a) Items chargeable to capital or to expense at taxpayer's option. (1) Option with respect to intangible drilling and development costs in general: All expenditures for wages, fuel, repairs, hauling, supplies, etc., incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas, may, at the option of the taxpayer, be deducted from gross income as an expense or charged to capital account. Such expenditures have for convenience been termed intangible drilling and development costs. * * * * * * (d) * * * Any election so made is binding for all subsequent years. * * * ↩3. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * (1) DEPLETION. - In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * * ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620918/	C. A. GODING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. H. A. HOWE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Goding v. CommissionerDocket Nos. 71153, 67555.United States Board of Tax Appeals34 B.T.A. 201; 1936 BTA LEXIS 737; March 24, 1936, Promulgated 737 1. During the taxable year the J. W. Carter Co., following a consistent practice, redeemed preferred stock previously issued as a dividend. Held, that the redemption of the said stock constituted a taxable dividend within the meaning of section 115(g) of the Revenue Act of 1928. 2. The respondent is sustained in his disallowance of a deduction claimed as a loss on certain bank stock which was not sold nor shown to be worthless during the taxable year. Eugene Meacham, Esq., for the petitioners. Nathan Gammon, Esq., and E. A. Tonjes, Esq., for the respondent. TURNER 201 These proceedings, consolidated for hearing, involve deficiencies in income tax for the year 1930, determined by the respondent as follows: C. A. Goding$10,072.63H. A. Howe398.53Two issues are presented for determination in the case of C. A. Goding - (1) whether the redemption of preferred stock by the J. W. Carter Co. in 1930 should be treated as a taxable dividend within the meaning of section 115(g) of the Revenue Act of 1928, or as a sale of the stock by the petitioner, and (2) whether the respondent erred in determining deductible losses738 claimed in respect of stock of Fourth & First Banks, Inc. Only the first of these issues is involved in the case of H. A. Howe. 202 FINDINGS OF FACT. The petitioner, C. A. Goding, is president and general manager of the J. W. Carter Co., a Delaware corporation engaged in the business of manufacturing shoes in Nashville, Tennessee. The petitioner, H. A. Howe, is manager of the factories. The J. W. Carter Co. was incorporated in April 1922 to succeed a partnership of the same name which was also engaged in the shoe manufacturing business. Immediately after incorporation the stock of the J. W. Carter Co. was held, as follows: StockholderPreferred stock, par value $100 per shareShares of common stock, no par valueC. A. Goding$175,0006,120J. W. Carter305,0002,667H. A. Howe37,0001,213Total517,00010,000The preferred stock was nonvoting and provided for the payment of 8 percent cumulative dividends. The assets of the partnership were carried into the books of the corporation as payment for the preferred stock. The common stock was designated as having been issued for good will, which was carried into the books of the corporation739 at $1. In 1926 the petitioners acquired all of the common stock of J. W. Carter and thereafter Goding owned 8,000 shares and Howe 2,000 shares of the outstanding 10,000 shares of common stock. From time to time during the period of 1922 to 1929, inclusive, additional preferred stock was issued and at other times during the same interval preferred stock was retired at par. The preferred stock issued and retired during that period and the dates of issue and retirement are shown, as follows: IssuedRetiredIssued at incorporation$517,000.00Dividend on common stock, January 1, 1923154,976.42Purchased for cash by Carter and Goding36,663.58Dividend on preferred stock, January 1, 192341,360.00Dividend on common stock, January 1, 1924184,000.00Retired January 31, 1924(from H. A. Howe)$18,000Retired January 1, 1926461,000Dividend on common stock, January 2, 1927745,000.00Retired April 30, 1927325,000Retired January 15, 1929 (from J. W. Carter)150,000Dividend on common stock, January 24, 1929150,000.00The earnings of the J. W. Carter Co. from date of incorporation to December 31, 1929 (taxable net income plus nontaxable740 items, less income taxes), were as follows: 1922$42,708.371923153,383.321924262,359.621925249,484.111926164,512.091927$148,316.171928270,700.521929238,108.90Total1,529,573.10203 Surplus at December 31, 1929, as shown by the books, with an adjustment of $3,469.79 to reconcile earnings with the amounts just stated, was $101,910.91. No cash dividends have ever been paid on the common stock. Cash dividends paid on the preferred stock up to and including the year 1929 are as follows: January 2, 1926$146,560January 2, 192736,400January 15, 1929140,000Total322,960The following amounts up to and including the year 1929 were charged to surplus account in respect of preferred stock issued as dividends: January 1923$70,064.42January 2, 1924184,000.00January 2, 1927745,000.00January 24, 1929150,000.00Total1,149,064.42On January 1, 1930, the stock of the corporation was held as follows: StockholderShares of common stockShares of preferred stock, par value $100 per shareC. A. Goding8,0005,200J. W. CarterNone2,000H. A. Howe2,0001,300Bertha A. GodingNone250Total10,0008,750741 On January 2, 1930, the J. W. Carter Co. acquired from J. W. Carter, 2,000 shares of preferred stock, paying therefor $200,000 in cash. This stock was transferred on the books of the corporation to C. A. Goding, Bertha E. Goding, his wife, and H. A. Howe, in the amounts of 1,500 shares, 100 shares, and 400 shares, respectively. The corporation received no consideration for the stock so transferred. The transfer was treated as a dividend and was covered by a charge against surplus in the amount of $200,000, the par value of the stock. On the same date a cash dividend on preferred stock 204 was paid in the amount of $70,000 and, in addition thereto, 800 shares of preferred stock held by Goding and 200 shares of preferred stock held by Howe were retired, the personal account of these stockholders being credited with $80,000 and $20,000, respectively, the par value of the stock so retired. The balance sheet of the J. W. Carter Co., as of January 1, 1930, showed cash on hand in the amount of $58,833.70. Neither Goding nor Howe received cash for any of their preferred stock retired during the years 1924, 1926, 1927, 1929, and 1930, but their personal accounts with the742 J. W. Carter Co. were credited with amounts equal to the par value of the preferred stock on the dates on which it was retired. The personal accounts of the petitioners with the J. W. Carter Co. at the end of each of the years 1922 to 1929, inclusive, were as follows: C. A. GodingH. A. HoweDec. 31, 1922$34,391.28 Credit balance$31.38 Credit balance.Dec. 30, 1923113,360.79 Debit balance12,902.14 Debit balance.Dec. 30, 1924302,098.04 Debit balance15,936.70 Debit balance.Dec. 31, 1925383,131.37 Debit balance33,386.14 Debit balance.Dec. 31, 1926209,171.61 Debit balance73,627.22 Debit balance.Dec. 30, 1927Account closed2,333.55 Debit balance.Dec. 30, 192872,045.86 Debit balance15,889.45 Debit balance.Dec. 30, 1929159,622.47 Debit balance35,631.53 Debit balance.Goding had been a member of the partnership from 1902 and became president of the corporation at the time of its organization. No formal meetings of the stockholders or directors of the corporation have been held at any time. It has always been managed and controlled entirely by Goding. Prior to 1930 and over a period of years, Goding acquired, by purchase, 743 stock dividends and stock "split-ups", 638 shares of stock in Fourth & First Banks, Inc., at a total cost of $94,652.80. In 1930, he sold 388 shares of this stock for a total selling price of $51,256, leaving 250 shares which were not disposed of during that year. The sale of the stock was effected through officials of the bank who were instructed to sell all of the petitioner's stock at the market. After selling 388 shares of the stock, the bank officials advised the petitioner that they were unable to sell the remaining shares. Sales of stock of Fourth & First Banks, Inc., were made on the market in Nashville, Tennessee, at prices ranging from $160 per share on February 1, 1930, to $52.25 per share on December 31, 1930. In 1931 the stock was sold at prices ranging from $16 down to $8 per share, and in 1932 at prices of $8 and $8.50 per share. The sales during the years 1930, 1931, and 1932 were in small lots. 205 OPINION. TURNER: On their returns the petitioners treated the redemption of the preferred stock of the J. W. Carter Co. as a sale and reported a profit thereon. In their petitions they allege that the profit so reported was correct. On the basis of744 amendments to the petition, filed in accordance with leave granted at the hearing, it is now contended that the amounts received in redemption of the stock represented the return of capital and that the petitioners are entitled to refunds. It is the respondent's contention that the stock was redeemed at such time and in such manner as to bring the transaction within the provisions of section 115(g) of the Revenue Act of 1928 1 and that the distribution and redemption of preferred stock was, under the provisions of that section, a taxable dividend. 745 A review of the history of the corporation convinces us that the redemption of the stock was in keeping with the consistent practice and method for distributing earnings to its stockholders. Great stress is placed on the statement made on the witness stand by petitioner Goding, that the redemption of the stock was not a part of any unified plan of distributing corporate earnings. Regardless of whether the issuance and redemption of preferred stock was in accordance with any unified plan therefor, it is obvious that it was in accordance with a consistent practice of the corporation from its inception. Except for cash dividends approximating the 8 percent cumulative dividend on the preferred stock, no formal distribution of earnings was ever made, yet we find that prior to January 1, 1930, earnings of the corporation in the amount of $954,000 had been distributed to the stockholders through the issuance and redemption of preferred stock. This was approximately three times the amount that had been distributed as cash dividends on preferred stock. It is argued by the petitioner that corporate surplus was not available for the distribution of the dividend and that the respondent's746 case must fall for that reason. While it is true that book surplus at December 31, 1929, was only $101,410.90, and on January 2, 1930, there was a cash dividend of $70,000, as well as a redemption of the preferred stock in question, it must be remembered that the 206 charge to surplus in respect of the preferred stock had been made at the time the stock was issued. The facts show that the earnings of the corporation up to that date were more than sufficient to cover both items. Up to the beginning of the taxable year the corporation had paid cash dividends amounting to $322,960 and had redeemed preferred stock amounting to $954,000, or a total of $1,276,960 over the life of the company. The earnings over the same period amounted to $1,529,573.10 and this amount does not include surplus at April 30, 1922, in the amount of $44,363.23, the source of which is not shown. Mention is made that in 1926 or 1927 certain bankers complained that the dividend requirements of the petitioner's preferred stock were too high and that this was the occasion for the redemption of at least a portion of the preferred stock. This contention is not at all convincing, however, since the facts747 show that subsequently the corporation continued to issue preferred stock as dividends and to retire portions thereof at intervals in the same manner as had been done before. According to petitioner Goding's recollection, this criticism of the bankers came shortly after the retirement on January 1, 1926, of preferred stock having a par value of $461,000. In the face of this complaint, however, the corporation, on January 2, 1927, issued as a dividend preferred stock of the par value of $745,000 and on January 24, 1929, issued another dividend in preferred stock amounting to $150,000. In this connection the petitioner cites . The facts here are altogether different from the facts in that case, which there disclosed a purpose and intention of compliance with the recommendation of the bankers for readjusting the capital structure of the corporation. In the light of those facts, there was no basis for the claim that the redemption of the stock was such as to constitute a dividend. In the present case the petitioner, Goding, directed and controlled all of the activities of the corporation. It appears that the consistent practice was748 to issue preferred stock against corporate earnings, rather than to pay the earnings to the stockholders in the form of cash dividends. In the meantime, however, the stockholders made substantial withdrawals from the corporation from time to time. At some subsequent date, determined by Goding, the preferred stock so issued as dividends was redeemed and amounts were credited to the accounts of the stockholders equal to the par value of the stock so called in. So far as the record shows, the amounts of preferred stock redeemed, plus cash dividends paid, never at any time exceeded the earnings or profits of the corporation even though the books of the company did not show earnings as such by reason of the charges against surplus at the time the preferred stock was issued. Clearly the redemption of the stock in question was made at such 207 time and in such manner as to constitute the redemption thereof a taxable dividend within the meaning of section 115(g), supra. , affirming 749 ; , affirming ; , affirming . Furthermore, it does not appear from the record before us that the amounts received in redemption of the preferred stock should be excluded from income, even though it be held that the distribution did not constitute a dividend. If, as the petitioners contend, the issuance and redemption of preferred stock from time to time were not distributions of earnings but distributions chargeable to capital, the facts would indicate that the bisis for preferred stock in the hands of the stockholders had long since been exhausted and under section 115(c) of the Revenue Act of 1928, the entire amount received by the petitioners during the taxable year would be gain from the sale or exchange of property. The remaining issue has to do with the determination of losses sustained by the petitioner, Goding, from the sale of Fourth & First Banks, Inc., stock. It is stipulated that he was the owner of 638 shares of stock acquired by purchase, exchange, stock dividends, and other750 methods, at a total cost to him of $94,652.80, and that he sold during the taxable year 388 shares of this stock for a total price of $51,256, leaving 250 shares unsold. It is his contention that the remaining shares of stock became worthless during the taxable year and that he is entitled to a deduction of the balance of cost by reason of the worthlessness of these 250 shares of stock. The facts do not give support to this contention. While the selling price of the stock declined materially and sales were made in small lots only, it appears that the stock sold on December 31 at as much as $52.25 a share, that sales were also made in 1931 at prices ranging from $16 to $8, and in 1932 at prices from $8 to $8.50 per share. It is true that none of these sales involved as much as 250 shares of the stock. They do indicate, however, that the stock was not worthless during the taxable year as claimed by petitioner. There is no showing whatever on the part of the petitioner that the block of stock which remained unsold in 1930 could not have been sold in small lots over a period of time at prices approximating those at which other lots of stock were sold during the years 1930, 1931, 751 and 1932. The loss from the sale of 388 shares is deductible and should be computed on the basis of the stipulated cost of the stock. The remaining 250 shares of stock not having been sold and not being worthless during the taxable year, there is no merit to the petitioners' position on the second issue. Decision will be entered under Rule 50.Footnotes1. SEC. 115. (g) Redemption of stock.↩ - If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redepmtion is made after January 1, 1926.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620919/	H. WILENSKY & SONS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.H. Wilensky & Sons Co. v. CommissionerDocket No. 5611.United States Board of Tax Appeals7 B.T.A. 693; 1927 BTA LEXIS 3117; July 22, 1927, Promulgated 3117 The owner of a building in poor condition entered into an agreement with a contractor to place the same in a tenantable condition. The petitioner contracted to purchase such building at an agreed price and in addition to pay to the vendor the amount which the latter was required to pay to the contractor for the work to be done. The contract to purchase was executed and the building was placed in tenantable condition by the contractor, the petitioner paying the vendor for the cost of such work. Held, that the petitioner is not entitled to deduct, as an ordinary and necessary expense, the amount representing the cost of the work done by the contractor. William M. Williams, Esq., for the petitioner. Harold Allen, Esq., for the respondent. PHILLIPS 693 The present proceeding arises from the determination by the Commissioner of a deficiency of $4,942.20 in income and profits tax for 1919. It is alleged that the Commissioner committed error in holding that the petitioner is not entitled, in computing his net income for 1919, to a deduction of $10,837.15 claimed to have been expended during that year for repairs upon a building in Atlanta, 3118 Ga. FINDINGS OF FACT. The petitioner is a Georgia corporation having its principal office at Nos. 38-42 West Alabama Street, Atlanta. In 1919, E. H. Inman owned a certain brick building located at Nos. 23, 25, 27, Forsyth Street, Atlanta, Ga. The back part of this building was one story high with a basement. It was about 70 feet wide and 120 feet long and had a front entrance about 20 feet wide at No. 23. Until July, 1919, it had been leased as a cotton warehouse at a rental of $35 per month. 694 This warehouse was a very old building and had not been kept in repair. The roof was made of wood sheeting covered with felt treated with tar and gravel. The gravel had washed off; the felt covering had come away in many places, exposing the sheeting, which had in consequence rotted away. There was a monitor on the roof and skylights built to supply light to the building. The glass in these had been broken out and the sash had rotted away. The coping on top of the walls had disintegrated and the tin flashing had rusted out. The main floor of the building was of wood. It was supported on wooden columns resting on a brick base capped with a stone. These brick3119 had disintegrated, the columns rotted at the bottom, and the heavy weight of the cotton stored on the floor had caused it to sag. It was also damaged from water and a number of the joists were broken. The basement floor was of wood and there was a wooden incline or ramp about 8 feet wide leading down to it. Water coming through the roof collected in the basement and both the floor and the incline were rotted out. The brick in the walls were porous and in many places had disintegrated from action of the frost and water. At one place, where there was a back entrance to the warehouse, the foundation had given way and the wall had cracked and was in danger of collapse. The windows were broken out, the sash decayed, and the doors worn out. About July, 1919, the tenant moved out of the warehouse and Inman entered into an agreement with Charles W. Bernhardt, a builder, to make alterations and repairs and put the building in tenantable condition, the work to be done on the basis of cost plus 10 per cent. Thereafter, on August 22, 1919, the building was leased by Inman to one Barnwell for a garage, for a term of two years and three months, at a rental of $250 per month. This3120 lease was executed pursuant to a prior oral agreement. On August 7, 1919, Inman, through a local real estate firm, entered into a contract of sale of the property including the warehouse with H. Wilensky. This contract recited in part as follows: PAYNE & MCARTHURReal Estate and Renting Agents Atlanta, Ga. ATLANTA, GA., August 7th, 1919.$1,000.00 RECEIVED OF H. Wilensky, One Thousand and no-100 Dollars as part purchase money on the following described property to-wit: - All that tract or parcel of land lying and being in the City of Atlanta, Georgia, size of lot Seventy (70) feet frontage on Forsyth Street by Two Hundred (200) feet, more or less, in 695 depth, upon which there is situate a two story brick store building known as numbers Twenty Three (23), Twenty Five (25) and Twenty Seven (27) South Forsyth Street, which on and for account of the owner and vendor we have this day sold to the purchaser above named subject to the titles being good, or made good within a reasonable time, for the sum of $105,000.00 Dollars, to be paid as follows: Pay in cash the sum of $40,000.00 when trade is consummated. Give notes for balance of purchase price to bear3121 6% interest from date and payable on or before one (1), two (2) and three (3) years, divided in three equal annual installments. Said H. Wilensky agrees further to assume lease to be made by E. H. Inman with Claude Barnwell and said Wilensky agrees further to pay to said E. H. Inman costs of improvements contemplated under said lease with Claude Barnwell, which improvements are estimated to cost $5,000.00. Payne & McArthur are to receive no commission on the cost of said improvements. All dimension more or less. PAYNE & MCARTHUR, By I hereby agree to purchase the above described property on the terms and conditions above named this 7th day of August 1919. (Signed) H. WILENSKY, Purchaser.I hereby ratify and approve the above mentioned sale on the terms and conditions named and agree to pay PAYNE & MCARTHUR, on the date formal transfer is made, a commission of regular Dollars. This 8th day of August 1919. (Signed) E. H. INMAN Owner and Vendor.On August 22, 1919, this contract was assigned by H. Wilensky to petitioner and the purchase was made by it pursuant to the terms of the contract. The lease with Barnwell was assigned to the petitioner by3122 Inman. The work done on the warehouse by the contractor was as follows: In places where the sheeting of the roof was rotted out, it was replaced; some of the rafters were renewed; the entire roof was scraped, leveled up, covered with three-ply felt and coated with tar and gravel. The monitor, which was about 40 feet long by 10 feet wide, was repaired, new frames were used to replace those rotted out, and new glass was put in the frames. New frames and glass were also put in the skylight and an additional skylight was built in. The tin flashing was all renewed and new down spouts were put on. The coping on the wall was renewed. In places in the wall where the brick had disintegrated they were cut out and new brick and mortar put in. Some of these places covered 2 or 3 square feet. At the rear entrance where the wall had cracked and the foundation had given way, it was necessary to tear out approximately 20 feet of the wall and rebuild it. In all there were 35,500 new brick used to repair the walls. The doors were 696 replaced with new ones and new windows, sash and glass had to be put in on the main floor. The main floor in the building was taken up and replaced, 3123 some of the old flooring being used in the replacement. The broken joists were replaced and two or three new girders were put in. About three-fifths of the columns supporting the floor were replaced with new ones. The floor was jacked up, the brick bases renewed and new concrete bases were put under the columns. The old wooden floor of the basement was taken out and a new concrete floor put in. The entrance leading into the building from the front was covered with a concrete floor. The incline or ramp leading to the basement was rebuilt. The worn out plumbing was replaced, and some new and additional plumbing was installed. The building had not been wired for electricity and new electric wiring was put in. The large doors at the front entrance having worn out, new doors were built and attached. There had been an arch over the door and window at the back entrance. This was torn out and steel girders put in. Grantings were installed in the sidewalk to increase the ventilation of the basement. Doors and window sash were painted and the interior of the building was painted white to increase the light. The effect of these repairs and improvements was to put the building3124 in a tenantable condition. Its size was not increased and its general character remained the same. The total cost for these repairs, improvements and replacements was $10,968.55. This cost was paid by Inman and he was reimbursed by petitioner in 1919 under the terms of the contract of sale. The petitioner, in computing its net income, deducted as expense and repairs, $10,968.55. The entire amount was disallowed as a deduction by the Commissioner in computing the deficiency. OPINION. PHILLIPS: It is the contention of the petitioner that the amounts expended in 1919 upon the building which it purchased in that year were for repairs and are deductible as ordinary and necessary expenses in computing its taxable income. With this view we can not agree. As a part of its purchase, the petitioner acquired an old building in a very dilapidated condition, for which it agreed to pay $105,000. There was outstanding a contract for the restoration of the building, and as another part of the purchase the amount paid by the vendor under such contract was to be repaid him by the purchaser. The total amount so expended, whether paid to the vendor as a part of the purchase price or3125 as a part of the payment to the contractor, represented the cost to the petitioner of the restored building. For $105,000, plus an additional amount to be 697 paid the contractor, the petitioner was to have, not the old building in its then condition, but a building in a usable condition. The situation here presented is entirely different from that of a taxpayer who repairs damage which has occurred to a building while he was the owner of it and who, after such repairs, has no greater asset than he originally owned. Decision will be entered for the respondent.Considered by MARQUETTE and MILLIKEN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620920/	FINANCE & INVESTMENT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Finance & Inv. Corp. v. CommissionerDocket No. 32216.United States Board of Tax Appeals19 B.T.A. 643; 1930 BTA LEXIS 2353; April 22, 1930, Promulgated 2353 William C. Sullivan, Esq., for the petitioner. J. D. Kiley, Esq., for the respondent. LANSDON 643 OPINION. LANSDON: The respondent has asserted a deficiency in income tax for the year 1925 in the amount of $152.76. The only error pleaded 644 by petitioner is that respondent has improperly disallowed as deductions from gross income certain amounts paid in the taxable year as dividends on outstanding preferred stock. It is the theory of the petitioner, a Delaware corporation with its operating office in Washington, D.C., that such payments were interest on indebtedness and that the owners of the preferred stock in question were its creditors and not stockholders. The petitioner's certificate of incorporation contains the following: The total authorized capital stock of this corporation consists of Five Thousand (5,000) shares of common stock of the par value of Five Dollars ($5.00) per share, and Four Thousand (4,000) shares of preferred stock of the par value of Twenty-five Dollars ($25.00) per share. The corporation will commence business with Five Hundred shares of common stock of the par value of Five Dollars each. The preferred2354 stock may be issued as and when the Board of Directors shall determine, and shall entitle the holders thereof to receive and corporation shall be bound to pay out of the net earnings a dividend at the rate of eight (8%) per centum per annum, cumulative, payable in such instalments as the Board of Directors may prescribe, but before any dividend shall be set apart or paid on the common stock; provided, however, that whenever a dividend is paid on the preferred stock the Board of Directors shall have power in their discretion to declare and pay a dividend for a like period on the common stock, and in such amount as they may deem appropriate. The holders of preferred stock shall not have any voting power whatsoever. The holders of preferred stock shall, in case of liquidation or dissolution of the corporation, before any amount shall be paid to the holders of the general common stock, be entitled to be paid the par amount of their shares and the dividends accumulated and unapid thereon, but shall not participate in any further distribution of the assets of the company. Any part of the whole of such preferred stock shall be subject to redemption, at the discretion of the Company2355 or of the holders thereof, at par plus accrued interest and unpaid dividends, on the thirty-first day of December, 1925, or at any dividend day thereafter; provided, that the company may by its Board of Directors limit the percentage which may be redeemed at the discretion of the holders thereof at any one time, may prescribe a bonus to be paid upon redemption made at the discretion of the company and a discount to be deducted upon redemption made at the discretion of the holders, and may also prescribe a specified notice to be given either by the company or by the holders, or by both, as a condition to the exercise of the right of redemption. Without action by the stockholders, the shares of stock, common and preferred, as now authorized and as the same may hereafter be increased, may be issued by the corporation from time to time for such consideration as may be fixed from time to time by the Board of Directors thereof, without right or obligation or apportionment of any kind, and any and all such shares so issued, the full consideration for which has been paid or delivered, shall be deemed full paid stock and not liable to pay further call or assessment thereon, and the holders2356 of such shares shall not be liable for any further payment thereon. 645 The preferred stock certificates in question were, in form, as follows: No. Shares THE FINANCE AND INVESTMENT CORPORATIONINCORPORATED UNDER THE LAWS OF THE STATE OF DELAWAREThis certifices that is the owner of shares of the Preferred Capital Stock of THE FINANCE AND INVESTMENT CORPORATIONof the par value of $25 each upon the terms and conditions following: Transferable only on the books of the Corporation by the holder hereof in person or by attorney upon surrender of this certificate, properly endorsed; the holder hereof shall be entitled to receive out of the net earnings of the Corporation a fixed, cumulative dividend at the rate of 8% per annum, payable quarterly beginning March 31, 1925, before any dividend shall be set apart or paid on the common stock; in case of liquidation or dissolution, the holder hereof shall be entitled to be paid in full, both the par value hereof and the cumulative unpaid dividend hereof, before any amount shall be paid to common stockholders; the holder hereof shall not by reason hereof be entitled to vote at any meeting of the Corporation, or to participate2357 in its earnings or profits beyond the said cumulative 8% dividend; preferred stock is redeemable in whole or in part at the election of the Corporation or of the stockholders upon 60 days' written notice prior to any dividend payment date on or after December 31, 1925; provided, redemption at the election of the Corporation shall be at par value plus 5% and accrued and unpaid dividends, and at the election of the stockholder shall be at 5% less than par, plus accrued and unpaid dividends; provided, further, that the Corporation shall not be required to redeem more than 10% of the actually issued and outstanding preferred stock at any one dividend payment date, and such redemption shall be in the order of application therefor. IN WITNESS WHEREOF this Corporation has caused its name to be signed and its corporate seal to be affixed hereto by its duly authorized officers this day of , A.D. 19 . Secretary. FULL PAID President. NON-ASSESSIBLE CAPITAL STOCK Preferred, 4,000 shares, Par value $25.00 each. Common, 5,000 shares, Par value $5.00 each. $25.00.The question here raised has been decided by this Board in several proceedings. *2358 It will be noted that both the certificate of incorporation and the recital or contract on the face of the preferred stock certificate expressly provide that dividends on such stock are payable only from the net earnings of the petitioner. Clearly, the amounts paid in for preferred stock are at risk in the business and are a part of the capital of the petitioner. ; . Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620921/	JOHN D. DEWHURST, JR. and ARLENE DEWHURST, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDewhurst v. CommissionerDocket No. 2124-88United States Tax CourtT.C. Memo 1989-499; 1989 Tax Ct. Memo LEXIS 502; 58 T.C.M. (CCH) 136; T.C.M. (RIA) 89499; September 11, 1989John D. Dewhurst, Jr., and Arlene Dewhurst, pro se. James S. Yan, for the respondent. GERBERMEMORANDUM OPINION GERBER, Judge: Respondent in a motion filed August 7, 1989, moved for summary judgment under Rule 121. 1 By Court order dated August 10, 1989, petitioners were permitted to object or respond to respondent's Motion for Summary Judgment. Petitioners failed to make a response. Respondent, in a December 23, 1987, notice of deficiency, determined for the taxable year 1983 a $ 12,036 deficiency in income tax; a $ 2,264.50 addition to tax under section 6651(a)(1); a $ 601.80 addition to tax under section 6653(a)(1); and an addition of 50 percent of the interest due on $ 8,698 under section 6653(a)(2). 503 After petitioners' failure to contact respondent or to attend a meeting scheduled to discuss their case, respondent on June 23, 1989, served a First Request for Admissions on petitioners. Petitioners failed to file a response, and the requests for admissions are deemed admitted under Rule 90(c). The following pertinent facts are deemed admitted: Petitioners resided in Whittier, California, at the time of the filing of their petition herein. Petitioners filed their 1983 joint Federal income tax return on April 18, 1985. The 1983 return reported a $ 2,978 tax liability which was not paid by petitioners. On October 14, 1986, petitioners filed an amended 1983 return reflecting a zero tax liability and seeking a $ 575 refund. Respondent began an examination of petitioners' 1983 taxable year by means of an April 13, 1987, letter, and petitioner-husband sent a April 27, 1987, letter which contained insults and profanity but did not address any of the examination matters concerning petitioners' 1983 taxable year. Petitioners failed to appear at all meetings scheduled by respondent's examining agent. Petitioners claimed a dependency exemption for Wanda Taylor, but have failed to504 prove that they provided one-half of Wanda Taylor's support. Petitioner's claimed $ 1,701 in medical and dental expenses, but have failed to substantiate any of these items. Petitioner's claimed $ 1,020 for charitable deductions and they also failed to substantiate these items. Concerning an engineering and plumbing business, petitioners claimed, but have not substantiated, the following amounts: Cost of goods sold -- $ 18,757 and business deductions -- $ 30,870. Petitioners' correct taxable income for 1983 is $ 41,127 and their income tax was understated in the amount of $ 8,698. Petitioners are liable for self-employment tax in the amount of $ 3,338. Respondent's determination is presumptively correct and the burden is on petitioners to establish that it is incorrect. ; Rule 142(a). Rule 121(b) provides that a motion for summary judgment shall be granted if the pleading and admissions show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. Petitioners here have not responded to the Court's or the respondent's inquiries or requests for information, facts, *505 or their views. Although petitioners have been willing to insult respondent, they failed or refused to provide information to support certain deductions and an exemption claimed on their 1983 return. Their failure to respond to respondent's request for admissions supplies sufficient facts to establish that no genuine issue as to any material fact remains in dispute, and accordingly summary judgment will be granted. To reflect the foregoing, Respondent's motion will be granted, and a decision will be entered for the respondent.Footnotes1. Rule references are to the Tax Court's Rules of Practice and Procedure. Section references are to the Internal Revenue Code of 1954, as amended and in effect for the taxable year 1983.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620924/	DAVID R. ALEXANDER and LILLIAN A. ALEXANDER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentAlexander v. CommissionerDocket No. 3300-82.United States Tax CourtT.C. Memo 1984-653; 1984 Tax Ct. Memo LEXIS 22; 49 T.C.M. (CCH) 327; T.C.M. (RIA) 84653; December 18, 1984. David R. Alexander, pro se. Janine L. Hook, for the respondent. GOFFE MEMORANDUM FINDINGS OF FACT AND OPINION GOFFE, Judge: The Commissioner determined deficiencies in petitioners' Federal income24 tax for the taxable years 1977, 1978, and 1979 and additions to tax under section 6653(a) 1 as follows: TaxpayerYearDeficiencySec. 6653(a)David R. Alexander andLillian A. Alexander1977$6,668$333.40David R. Alexander19783,204160.20David R. Alexander andLillian A. Alexander19792,847142.35After concessions by the parties, the issues for decision are: (1) whether petitioners may deduct business mileage expenses, employee business expenses, and various itemized deductions; (2) whether petitioners sustained a casualty loss deductible under section 165(c)(3), or recognized gain upon reimbursement in excess of adjusted basis, for damages caused by fire at their residence; (3) whether petitioner David R. Alexander is entitled to claim an exemption for his wife on his married, filing separately, individual Federal income tax return for the taxable year 1978; and (4) whether petitioners are liable for25 the additions to tax under section 6653(a) for negligence or intentional disregard of rules and regulations. FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts, supplemental stipulation of facts, and accompanying exhibits are so found and incorporated herein by reference. David R. Alexander (Mr. Alexander) and Lillian A. Alexander (Mrs. Alexander), husband and wife, were residents of Vancouver, Washington, at the time the petition in this case was filed. Petitioners filed joint Federal income tax returns for the taxable years 1977 and 1979. Mr. Alexander filed a married, filing separately, individual Federal income tax return for the taxable year 1978. Mrs. Alexander filed no income tax return for the taxable year 1978. On March 4, 1966, Mrs. Alexander purchased residential real property located at 2734 N.E. Wasco Street, Portland, Oregon, for $7,250. No allocation was made in the purchase contract between the real estate and the residence. However, the county assessor's statement for 1967-1968 shows assessed values as follows: LandBuildingTotalAssessed Value$300$1,580$1,880Percentage15.96%84.04%100.00%26 Petitioners married in 1974, and resided at this address. The residence and personal property contained therein were damaged in a fire on August 15, 1977. Petitioners carried insurance on the real and personal property in the amounts of $25,000 and $12,500, respectively. Petitioners were reimbursed for their losses by their insurance company in the amounts of $23,000 for the real property and $12,500 for the personal property. There were two separate valuations of the personal property damage. An arson investigation report prepared by the State of Oregon Fire Marshall's office valued the contents of the residence at $62,000, and the loss to those contents at $27,000. The insurance company adjuster listed the contents of the residence on a 13-page report and estimated the replacement value of the damaged personal property at $74,731.97, with an adjusted basis of $37,365.98. Some of the personal property for which petitioners received reimbursement were purchased by petitioners at garage sales or received by petitioners as gifts. The majority of the personal property balonged to Mrs. Alexander. Petitioners claimed casualty losses from this fire on Schedule A of27 the Federal income tax returns for the taxable years 1977, 1978, and 1979 as follows: 197719781979Loss before reimbursement$40,800$40,800$71,500Less insurance reimbursement12,50012,50035,500Unreimbursed loss$28,300$28,300$36,000Less floor100100100Loss claimed$28,200$28,200$35,900Loss used for the taxable year$12,100$13,000$11,000On or about August 29, 1977, Mrs. Alexander purchased residential real property located in Vancouver, Washington, for $25,000 cash. Mr. Alexander was employed as a drain cleaner for seven months of the taxable year 1977. Petitioners claimed a deduction in the amount of $1,998 for business mileage expenses on their joint Federal return for the taxable year 1977. Petitioners also claimed a deduction in the amount of $603.50 for radio beeper charges, cable, gloves, and parts used in Mr. Alexander's business on their joint Federal income tax return for the taxable year 1977. On November 23, 1981, the Commissioner timely issued 2 a statutory notice of deficiency to petitioners for the taxable years 1977 and 1979. The Commissioner determined that petitioners did not sustain28 a loss from the fire in 1977, as the insurance reimbursement received equaled the established basis in the damaged personal property. All deductions claimed under section 165 for casualty losses for damages to the personal property for both taxable years were therefore disallowed. The Commissioner further determined that the insurance reimbursement for the damage to the real property, to the extent that it exceeded an adjusted basis of zero, was capital gain in the taxable year 1977. The minimum tax on capital gain tax preferences under section 56 was also imposed for the taxable year 1977. Further adjustments were: (1) disallowance of the business mileage expenses in the taxable year 1977 as nondeductible commuting expenses; (2) disallowance of employee business expenses in the taxable year 1977 as unsubstantiated; and (3) disallowance of $419 of real estate taxes in the taxable year 1977 and numerous itemized deductions for the taxable year 1979, on the basis that total deductions claimed did not exceed the zero bracket amounts of $3,200 in the taxable year 1977 and $3,400 in the taxable year 1979. An addition to tax under section 6653(a) was imposed for both taxable29 years on the basis that a portion of the underpayment of tax for both taxable years was due to negligence or intentional disregard of rules and regulations. On November 23, 1981, the Commissioner also issued a statutory notice of deficiency to Mr. Alexander, individually, for his married, filing separately, individual Federal income tax return for the taxable year 1978. The Commissioner again determined that petitioners had not sustained a casualty loss as a result of the fire, and disallowed the carryover deduction claimed for the loss. The Commissioner deducted $950 of state income tax refund from income during taxable year 1978, on the basis that petitioners received no prior tax benefit from payment of the tax, due to their inability to itemize deductions in the taxable year 1977. As in the notice of deficiency for the taxable years 1977 and 1979, 30 the Commissioner disallowed all itemized deductions for the taxable year 1978 as the total of such deductions did not exceed the zero bracket amount of $1,600. Finally, as it had not been established either that Mrs. Alexander had no gross income or that Mr. Alexander provided over one-half of her support, the Commissioner disallowed the exemption claimed for Mrs. Alexander on Mr. Alexander's return. OPINION After concessions 3 by the parties, the issues for decision are: (1) whether petitioners may deduct business mileage expenses, employee business expenses, and various itemized deductions; (2) whether petitioners sustained a casualty loss deductible under section 165(c)(3), or recognized gain upon reimbursement in excess of adjusted basis, for damages caused by a fire at their residence; (3) whether petitioner David R. Alexander is entitled to claim an exemption for his wife on his married, filing separately, individual Federal income tax return for the taxable year 1978; and (4) whether petitioners are liable for the additions to tax under section 6653(a) for negligence or intentional disregard of rules and regulations. 31 The statutory notice of deficiency is presumptively correct, and petitioners have the burden of disproving each individual adjustment. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). In the absence of any evidence presented by petitioners to substantiate their deductions for business mileage expenses or employee business expenses in the taxable year 1977, petitioners are deemed to have conceded the correctness of the Commissioner's determination. Similarly, no evidence was presented to substantiate the itemized deductions claimed in any of the taxable years at issue with the exception of the evidence pertaining to the casualty loss. The Commissioner's determination that petitioners are entitled to claim only the zero bracket amounts for the taxable years 1978 and 1979 is therefore sustained. Fur the taxable year 1977, the Commissioner's determination to disallow the unsubstantiated deductions is also sustained, although the zero bracket amount is not applicable for reasons discussed below. The major issue in this case is that of the deductibility of a casualty loss. Respondent agrees that petitioners' property was damaged by a fire in the taxable32 year 1977. The issue for decision, however, is whether the casualty resulted in a sustained loss under section 165(c)(3) or a recognized gain. For clarity, the casualty will be discussed first with reference to the real property, and second, with reference to the personal property. We need not examine the validity of the county assessor's allocation of value between the real estate and the residence for purposes of determining whether petitioners sustained a loss to the real property. An allocation is unnecessary where the real property is neither used in a trade or business nor in any transaction entered into for profit. Secs. 1.165-7(b)(2)(ii) and (3) (Example (3), Income Tax Regs. Although Commissioner determined that petitioners had an adjusted a basis of zero in the real estate, we find that petitioners have proved a cost basis in the real property of $7,250. Petitioners therefore realized a capital gain of $15,750 upon the receipt of insurance proceeds in the amount of $23,000 for the damage to the residence. Realization of gain does not, however, always equate to recognition of gain. In this instance, section 1033 applies to defer the realized gain. 33 Sec. 1.1033(b)-1, Income Tax Regs. Petitioners acquired property similar in use to the property destroyed before the replacement period under section 1033(a)(2)(B) had expired. Sec. 1033(a)(1). As the cost of the newly acquired property in the amount of $25,000 exceeded the conversion proceeds of $23,000, the basis of the replacement property is computed as follows: $25,000 (basis of newly acquired property) less $15,750 (unrecognized gain realized upon destruction), resulting in a basis for the newly acquired property of $9,250. Sec. 1033(b). Recognition of the gain realized is therefore postponed to a sale, exchange, or other disposition in a taxable year after the taxable year 1977. Petitioners also contend, however, that they realized a substantial loss on the personal property damage despite reimbursement by insurance. Generally the amount of the loss is determined under section 1.165-7(b)(1), Income Tax Regs.: In the case of any casualty loss whether or not incurred in a trade or business or in any transaction entered into for profit, the amount of loss to be taken into account for the purposes of section 165(a) shall be the lesser of either-- (i) The amount which34 is equal to the fair market value of the property immediately before the casualty reduced by the fair market value of the property immediately after the casualty; or (ii) The amount of the adjusted basis * * for determining the loss from the sale or other disposition of the property involved. Section 165(a) provides that the deduction for a casualty loss is always reduced by insurance or other compensation received for the loss. Section 165(c)(3) further provides that each loss of property is deductible only to the extent that it exceeds a floor of $100. Generally, a casualty loss is allowed as a deduction only for the taxable year in which the loss is sustained. Sec. 1.165-1(d)(1), Income Tax Regs.Petitioners have the burden of proving that the amount of their loss, i.e., the lesser of fair market value or basis, exceeded the insurance proceeds. Petitioners' evidence as to the lesser of basis or fair market value of the personal property consisted of Mr. Alexander's testimony, the arson investigation report, and the property loss worksheet prepared by the insurance adjuster, none of which were supported by any receipts or other documents. Although supporting35 evidence may be difficult or even impossible to obtain, petitioners are not relieved of their burden of proof. Burnet v. Houston,283 U.S. 223">283 U.S. 223 (1931); Rule 142(a). However, if petitioners can establish that some deduction is allowable, absolute certainty is not required and the Court may approximate the allowable deductions "bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making." Cohan v. Commissioner,39 F.2d 540">39 F.2d 540, 543-544 (2d Cir. 1930). After reviewing all of the evidence, we find that petitioners had an adjusted basis in the damaged personal property of $30,000. After adjustments for the insurance proceeds received by petitioners and the $100 floor under section 165(c)(3), petitioners may therefore claim a casualty loss of $17,400, subject to the restrictions that the deduction claimed cannot reduce petitioners' taxable income below zero, and that any excess deduction may not be carried over or carried back to another taxable year. The third issue for decision is whether Mr. Alexander is entitled to claim an exemption for his wife on his married, filing separately, individual Federal income tax return36 for the taxable year 1978. Although Mr. Alexander testified summarily that his wife had no income of her own that year, no supporting evidence was offered to show that his wife had no gross income and was not the dependent of another taxpayer. Sec. 151(b). Mr. Alexander has therefore failed to meet his burden of proof under Rule 142(a), and we must hold for respondent on this issue. Stephenson v. Commissioner,79 T.C. 995">79 T.C. 995, 1004 (1982); Breland v. United States,323 F.2d 492">323 F.2d 492, 497 (5th Cir. 1963). However, although Mr. Alexander is not entitled to claim an exemption for his wife on his return filed as married, filing separately, neither is he taxable on the one-half of his gross income attributed to Mrs. Alexander under the community property laws of the State of Washington. E. H. Stanton v. Commissioner,21 B.T.A. 1380">21 B.T.A. 1380 (1931). Petitioners also have the burden of proof with respect to the additions to tax. Bixby v. Commissioner,58 T.C. 757">58 T.C. 757 (1972); Enoch v. Commissioner,57 T.C. 781">57 T.C. 781 (1972). Petitioners presented no evidence that any underpayment of taxes in each of the taxable years*37 1977, 1978, and 1979 was not due to negligence or intentional disregard of the rules and regulations. The additions to tax under section 6653(a) must be sustained. Rule 142(a). Decision will be entered under Rule 155.Footnotes1. All section references are to the Internal Revenue Code of 1954, and attendant regulations as amended and in effect for the relevant years, and all rule references are to this Court's Rules of Practice and Procedure.↩2. In late 1980, petitioners executed a Form 872, "Consent to Extend the Time to Assess Tax," extending until the later of December 31, 1981, or 60 days after a notice of deficiency sent to petitioners on or before December 31, 1981, the period in which the Commissioner could assess Federal income tax for the taxable year 1977.↩3. At trial, respondent conceded $2,781 of the income adjustment for the taxable year 1977 and $24,900 of the income adjustment for the taxable year 1979, due to mathematical errors in the statutory notice.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620927/	The Juvenile Shoe Corporation of America, a Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentJuvenile Shoe Corp. v. CommissionerDocket No. 21255United States Tax Court17 T.C. 1186; 1952 U.S. Tax Ct. LEXIS 291; January 17, 1952, Promulgated 291 Decision will be entered for the respondent. Sale by petitioner of shares of its own stock to its vice president and general manager without any restriction as to its use or resale and not in furtherance of any consistent plan for officer stock ownership held on the facts to have resulted in realization of long term capital gain. Darrell D. Wiles, Esq., for the petitioner.Frank M. Cavanaugh, Esq., for the respondent. LeMire, Judge. LeMIRE 1186 OPINION.The Commissioner determined deficiencies in petitioner's income tax for the fiscal years ended October 31, 1945, and 1946, in the amounts of $ 5,962.50 and $ 619.75, respectively, and a deficiency of $ 279.81 in excess profits tax for the fiscal year ended October 31, 1946. The deficiencies for the fiscal year292 ended October 31, 1946, are conceded. The sole question presented is whether the Commissioner erred in his determination that the petitioner realized long term taxable gain upon the sale of its treasury stock to Alex Kaiser, its vice president and general manager, during the fiscal year ended October 31, 1945. It is conceded that the gain from the transaction, 1187 if taxable, is $ 23,850. All of the facts are stipulated and are found as stipulated.The petitioner is a Missouri corporation organized in 1918. It keeps its books and files its Federal income tax returns on a fiscal year basis ending October 31. Its returns for the taxable years involved were filed with the collector of internal revenue for the first district of Missouri.It is engaged in the manufacture of shoes, with plants located at Aurora and Sarcoxie, Missouri, and with sales offices in St. Louis, Missouri.The petitioner's amended articles of association authorize it, among other things, "to purchase, hold, sell and transfer shares of its own capital stock."Petitioner's original capital stock consisted of 9,250 shares of preferred stock of the par value of $ 25 per share and 5,000 shares of common stock293 of a par value of $ 1 per share. All of the outstanding preferred stock was reacquired and retired by the petitioner on or before July 1, 1944.On July 13, 1939, petitioner entered into a written contract to employ Joseph J. McBryan as sales and merchandise manager at a salary of $ 12,000 per year. One of the conditions of that contract required petitioner to transfer to McBryan 600 shares of its common stock. Under the terms of the contract McBryan could not sell the stock and when his contract of employment was terminated and other conditions of the contract fulfilled he was required to transfer it back to the petitioner.At the time this contract was entered into all of the authorized common stock had been issued and outstanding and petitioner had no treasury stock. On July 30, 1939, the petitioner purchased 600 shares of its common stock from Charlotte E. Reith for the sum of $ 3,333.33. She was the wife of the president of the company and at that time owned 2,585 shares of petitioner's common stock. On September 30, 1939, the shares so purchased were transferred to McBryan pursuant to his contract of employment. The book value of the common stock on May 31, 1939, and October294 31, 1939, was $ 13.78 and $ 16.09 per share, respectively. Petitioner's profits before taxes for the fiscal year ended October 31, 1939, were $ 62,554.On March 15, 1940, McBryan tendered his resignation as sales and merchandise manager and as vice president and director of petitioner and terminated his employment contract. Thereupon, he transferred back to the petitioner the 600 shares of common stock originally transferred to him under his contract of employment. These shares were represented by certificate issued in the name of petitioner and were held by it as treasury stock from on or about March 15, 1940, to on 1188 or about January 10, 1945. The shares were not voted and were not carried on the books as an asset and no dividends were paid thereon.On December 1, 1944, Alex Kaiser entered into the employment of petitioner as a vice president and on or about January 10, 1945, 100 of the above-mentioned 600 shares of treasury stock were sold to him at a price of $ 40.75 per share. Thereafter, on March 2, 1945, the remaining 500 shares were sold to him at the same price per share. The book value of petitioner's common stock as of October 31, 1944, was $ 41.93. Its 295 profits before taxes for the year ended October 31, 1944, were $ 90,558.So far as the evidence shows the transfer of the shares to Kaiser in 1945 was an outright sale to him with no terms, conditions, or restrictions attached. On January 28, 1946, Kaiser sold the 600 shares of common stock hereinabove mentioned back to the petitioner at the same price he had paid therefor and on or about April 30, 1946, terminated his employment with the petitioner. The book value of petitioner's common stock on October 31, 1945, and October 31, 1946, was $ 44.26 and $ 49.35 per share, respectively. Petitioner's profits before taxes for those years were $ 88,359 and $ 74,974, respectively.In purchasing the above stock Kaiser paid the petitioner $ 12,450 in cash and gave a personal note for the balance of $ 12,000. The ledger entries made on the books of the petitioner in connection with Kaiser's purchase and subsequent resale of the shares of stock were as follows:1-10-45Dr. cash$ 4,075Cr. treasury stock$ 100Cr. surplus3,9753-2-45Dr. notes receivable12,000Dr. cash8,375Cr. treasury stock500Cr. surplus19,8751-28-46Dr. treasury stock600Dr. surplus23,850Cr. cash24,450296 During all of the years 1939 through 1945, all of petitioner's common stock except 90 shares was owned by executive employees of petitioner or jointly by such employees and their wives, or solely by the wife of an employee or by a widow of a former employee. No understandings or agreements between stockholders and petitioner (except the McBryan contract of July 13, 1939) or between individual stockholders of petitioner, restricting the sale of petitioner's common stock, were in effect prior to the close of petitioner's fiscal year ended October 31, 1945.1189 Respondent urges that under section 22 (a) of the Internal Revenue Code, 1298 as construed in Regulations 111, section 29.22 (a)-15, 2 petitioner is subject to tax on the long term capital gain realized on its sale to Kaiser during the taxable year 1945. Petitioner contends that in its transaction with Kaiser it was not dealing in its own stock as it might in the shares of another corporation and therefore is not taxable under the regulations. Petitioner argues that it must be inferred from the stipulated facts that Kaiser was under a contractual obligation to resell the stock to petitioner on leaving its employment. 297 However, there is nothing to that effect in the stipulated facts, or elsewhere in the evidence, and we cannot so find. In support of his contention petitioner cites, among other cases, H. W. Porter & Co., 14 T. C. 307, revd. (C. A. 3) 187 F. 2d 939; Batten, Barton, Durstine & Osborn, Inc., 9 T. C. 448, revd. (C. A. 2) 171 F.2d 474">171 F. 2d 474; and Rollins Burdick Hunter Co., 9 T.C. 169">9 T. C. 169, revd. (C. A. 7) 174 F. 2d 698.299 We held on the facts in each of those cases that the taxpayer was not dealing in its own stock "as it might in the shares of another corporation" (Regs. 111, sec. 29.22 (a)-15), and was not taxable on the transaction. The appellate courts reversed. While the instant case is in some respects similar to those cases the crucial facts are different. Here there was no restriction on the sale or resale of petitioner's shares either by the petitioner or its stockholders. Neither was there any change in petitioner's capital structure by reason of petitioner's sale of the shares to Kaiser or the purchase of those shares 1190 from him. As a whole, the facts in the instant case are more like those in Brown Shoe Co., 45 B. T. A. 212, affd. 133 F. 2d 582. There we held the taxpayer taxable on the profit realized on the sale of its own shares to its president and other key employees where, as in the instant case, there was no alteration of the taxpayer's capital structure and no restriction on the sale of the shares. In Batten, Barton, Durstine & Osborn, Inc., supra, we pointed out that the facts*300 were clearly distinguishable from those in Brown Shoe Co., supra.We need express no opinion as to our present willingness to accede to the views of the respective appellate courts in the above cited cases since, on the facts in this case, the issue must in any event be decided for the respondent.Decision will be entered for the respondent. Footnotes1. SEC. 22. GROSS INCOME.(a) General Definition. -- "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the United States and judges of courts of the United States taking office after June 6, 1932, the compensation received as such shall be included in gross income; and all Acts fixing the compensation of such Presidents and judges are hereby amended accordingly. In the case of judges of courts of the United States who took office on or before June 6, 1932, the compensation received as such shall be included in gross income.↩2. Sec. 29.22(a)-15. Acquisition or Disposition by a Corporation of its Own Capital Stock. -- Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Internal Revenue Code.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620928/	Edward D. Rollert Residuary Trust, Genesee Merchants Bank & Trust Co., Trustee, Petitioner v. Commissioner of Internal Revenue, RespondentRollert Residuary Trust v. CommissionerDocket No. 16418-79United States Tax Court80 T.C. 619; 1983 U.S. Tax Ct. LEXIS 100; 80 T.C. No. 30; March 31, 1983, Filed 100 Decision will be entered under Rule 155. 1. Prior to his death on Nov. 27, 1969, decedent was an executive vice president of GM. Shortly before the date of death, GM had tentatively determined to issue bonuses for 1969 to a group of employees, including decedent. However, it was not until Mar. 2, 1970 -- more than 3 months after the date of death -- that the bonus was formally awarded to decedent. The bonuses were paid under an established deferred compensation plan, with bonuses never having been denied to executive vice presidents and decedent's having received over $ 300,000 annually in bonuses during the years 1964 through 1968. Held, amounts paid pursuant to this postmortem bonus are income in respect of a decedent, because, under the facts of this case, decedent had a right or entitlement to the bonus payments as of the date of his death.2. GM also awarded decedent bonuses in each of the years 1964 through 1968. These lifetime bonus awards, as well as the postmortem bonus award for 1969, were payable in annual installments, most of which became payable during years subsequent to 1969. Under decedent's will, rights to receive the bonus installments became part 101 of the residue of the estate. The estate distributed to P, the residuary legatee, the rights to receive certain of these installments when paid in years subsequent to the year of distribution. Both the estate and P treated the distribution of the rights as a distribution of the estate's distributable net income, even though the bonus installments would constitute income in respect of a decedent when paid. In the year the rights were distributed, P reported as income under sec. 662(a), I.R.C. 1954, the date-of-distribution fair market values of the rights, and the estate took a corresponding deduction under sec. 661(a), I.R.C. 1954. Under sec. 1.661(a)-2(f), Income Tax Regs., P took the date-of-distribution values as its basis in the rights, and in the subsequent years when the bonus installments were paid to it, P reported as income only the difference between such basis and the amount received. Held: Sec. 691, I.R.C. 1954, requires P to report the entire amount of bonus installments paid to it as income in the year when received. P had no basis in the rights to receive income in respect of a decedent because the estate's distribution of these rights to petitioner was not102 a distribution subject to secs. 661 and 662, I.R.C. 1954. Russell E. Bowers and Richard B. Covey, for the petitioner.Beth L. Williams, for the respondent. Whitaker, Judge. WHITAKER620 OPINIONRespondent determined deficiencies in petitioner's Federal income taxes in the amounts of $ 83,795 for 1973; $ 68,686 for 1974; and $ 2,675 for 1975.This case was submitted fully stipulated under Rule 122, Tax Court Rules of Practice and Procedure. The primary issues for decision are: (1) Whether rights to receive bonus payments under the General Motors bonus plan, which were attributable to an individual's employment106 with General Motors before his death but which were not formally awarded until several months after his death, are rights to income in respect of a decedent; and (2) whether rights to income in respect of a decedent which were distributed by the decedent's estate to petitioner in prior years acquired a basis in the hands of petitioner equal to their fair market value on the date of distribution. With respect to this second issue, we must specifically decide whether the rights to income in respect of a decedent were amounts "properly paid or credited" for purposes of sections 661(a)(2)1 and 662(a)(2). The second issue applies to post-death installments of bonus awards made prior to death, concededly income in respect of a decedent, as well as the postmortem bonus awards (issue 1), if we determine issue (1) in respondent's favor.On December 31, 1960, Edward D. Rollert, as settlor, and Genesee Merchants Bank107 & Trust Co., as trustee, executed a revocable trust agreement (hereinafter trust agreement). This trust agreement provided for the establishment of two separate trusts -- a marital trust and a residuary trust -- to administer assets owned by Mr. Rollert at death. The residuary trust is the petitioner herein. When the petition was filed, the principal place of business of the trustee was Flint, Mich.621 For several years prior to his death on November 27, 1969, Edward D. Rollert had been employed as an executive vice president of General Motors Corp. and had participated in the corporation's stock option plan and its bonus plan. These plans were designed to compensate corporate executives and other employees by providing cash and stock bonuses payable in installments in subsequent years. Amounts awarded under the plans were interrelated: if an employee was awarded a stock option bonus, any award under the bonus plan was reduced. All awards under the bonus plan for more than $ 2,000 were to be paid in cash or stock in annual installments over a 5-year period following the year of award. Bonuses under the stock option plan were in the form of contingent credits for General108 Motors stock. After the termination of stock options concurrently awarded to the executive, the contingent credits would entitle the executive to receive the stock. Like the bonuses under the bonus plan, the contingent credits under the stock option plan were credited in installments over a 5-year period. However, the period for applying the contingent credits started running from the date the options were terminated. Mr. Rollert's options terminated within 12 months after his death.During the period between the award of bonus rights under either of these plans and the employee's receipt of the final installment payment attributable to such rights, the employee had to "earn out" his or her right to the award by continuing to be employed by the corporation and not committing acts inimical to the best interests of the corporation. Death relieved an employee from the duty of earning out a bonus; thus, upon an employee's death, his or her estate, or the party entitled to the right, possessed a nonforfeitable right to subsequent installments of the bonus award.General Motors made awards to Mr. Rollert under both the bonus plan and the stock option plan for each of the years 1964109 through 1968. These awards, which exceeded $ 300,000 for each of these years, are referred to collectively as the "lifetime bonus awards." When Mr. Rollert died on November 27, 1969, the remaining installment payments of these bonuses became nonforfeitable and payable to Mr. Rollert's estate.Shown on page 623 is a copy of Joint Exhibit 6-F listing the 622 following information with respect to lifetime bonus awards made to Mr. Rollert:(A) Year of award determination. -- This shows the year in which the lifetime awards were determined.(B) Year of receipt. -- This shows the year in which installments of lifetime bonus awards were paid by General Motors and received by the Estate of Edward D. Rollert (hereinafter the estate) or petitioner. Lifetime bonus awards received in cash are so recorded; those received in stock are shown with the number of shares and the fair market value at delivery indicated.(C) Year of final installment. -- This shows the year in which the final installment of each lifetime bonus award was paid or delivered.On March 2, 1970, decedent was awarded a bonus under the bonus plan of 1,786 shares of General Motors common stock and $ 285,763110 cash with respect to his almost 11-months employment with the corporation in 1969. This is referred to hereafter as the "postmortem bonus award." The parties have stipulated that decedent "had no rights to the post-mortem bonus award during his lifetime." This bonus was to be paid in five annual installments, with the first installment in March 1970, and the subsequent installments on January 10 of the next 4 years. The installments for 1970, 1971, 1972, and 1973 each consisted of $ 57,168 cash and 357 shares of General Motors stock. 2 For 1974, the installment consisted of $ 57,090 cash and 358 shares of stock. No award was made to Mr. Rollert under the stock option plan with respect to his employment in 1969.The procedures for awarding bonuses under the bonus plan to an executive vice president, such as Mr. Rollert, were the same as those with respect111 to other employees. The bonus plan stated that it was contemplated that bonuses would be awarded annually but that the committee had the right from time to time to modify or suspend the plan. Bonuses were awarded under the bonus plan in all the years 1956 through 1969, and it was the practice during this period to grant awards to all executive vice presidents. 623 INSTALLMENTS OF BONUS AWARDED DURING LIFETIME BUT PAID AFTER DEATHYear finalYear of awardinstallmentYear of receiptdeterminationpaid1970StockStockCash# Shs.F.M.V.Cash1964 19742221965 19751970$ 61,5001966 1975197169,0001967 1974197266,7501968 1975197373,5001969 1975298Totals520$ 45,250270,750[Discrepancies in the above Joint Exhibit were not addressed by the parties.]Year of awardYear of receiptYear of receiptdetermination19711972StockStock# Sh.F.M.V.Cash# Sh.F.M.V.Cash1964 2232221965 1831841966 202$ 69,0002021967 26066,750260$ 66,7501968 27873,50027873,5001969 299298Totals1445$ 113,071.25209,2501444$ 118,949140,250112 [Discrepancies in the above Joint Exhibit were not addressed by the parties.]Year of awardYear of receiptYear of receiptdetermination19731974StockCashStock# Sh.F.M.V.# Sh.F.M.V.1964 2232231965 1841841966 2032031967 2592591968 278$ 73,5002781969 299299Totals1446$ 119,47673,500446$ 67,601[Discrepancies in the above Joint Exhibit were not addressed by the parties.]Year of awardYear of receiptTotal installmentsdetermination1975paid after deathStock# Sh.F.M.V.Stock (#)Cash1964 11121965 184919$ 61,5001966 2031010138,0001967 2601298200,0501968 2781390294,0001969 7223Totals925$ 33,8787223693,750[Discrepancies in the above Joint Exhibit were not addressed by the parties.]624 The first step to be taken in each year in deciding whether to award bonuses under the bonus plan was for the corporation's independent public accountants to determine an amount to be set aside in a reserve to be used to pay any bonuses that might be awarded113 under the two plans. The amount set aside was computed under a formula based generally on the corporation's net earnings, but the corporation's bonus and salary committee (hereinafter the committee) had discretion to direct that a lesser amount be credited. For the year 1969, an initial determination of the amount available for payment of bonuses was made on October 6, 1969, approximately 1 1/2 months prior to Mr. Rollert's death. This determination was reviewed monthly until February 2, 1970, when it was accepted as final.The second step in awarding bonuses was the selection of eligible employees for awards under the bonus plan. To do this, the committee designated a monthly salary rate, and with a few exceptions, all employees earning in excess of that rate were considered for bonuses in that year. On November 3, 1969 (again prior to the date of death), the committee made a tentative determination of awards for all executive vice presidents, including Mr. Rollert. This determination was reviewed monthly until finalized on March 2, 1970. During the review on January 5, 1970, the committee decided to make an award on account of Mr. Rollert's service despite his death but reduced114 it to an amount roughly equivalent to 11/12ths of the amount originally determined. This accorded with the committee's practice of prorating awards on the basis of the amount of actual service during the year. On March 2, 1970, the award for Mr. Rollert's 1969 service was formally made. It was for the amount determined on January 5, 1970.The provisions of the bonus plan stated that an employee would be eligible for consideration for a bonus in the year his or her employment terminated, at the discretion of the committee and under such rules as the committee might prescribe. As of the date of decedent's death, the committee had prescribed no rules dealing with the awarding of bonuses to employees who had died during the award year; but it had been the committee's practice, generally, to treat eligible employees who had at least 2-months active service in the award year the same as employees not terminating their service. Thus, the committee would deny a postmortem award 625 to an employee with at least 2-months service in the award year only if his performance had declined to the extent that he would not have been given an award if he had lived, or if he had acted or conducted115 himself in a manner inimical or in any way contrary to the best interests of the corporation. None of these exceptions applied to Mr. Rollert.Mr. Rollert did not report on his pre-death income tax returns any of the bonus awards at issue here. Nor were any of these amounts reported in Mr. Rollert's final individual income tax returns.Mr. Rollert executed his last will and testament on March 14, 1961. After he died, this will was admitted to probate. The executor of the estate, Genesee Merchants Bank & Trust Co. performed the administration of the estate and filed the U.S. Estate Tax Return, Form 706, for the estate. This return included in the gross estate the date-of-death values of the installments of the lifetime bonus awards that had not been paid or delivered to Mr. Rollert as of the date of death, but it did not include the postmortem awards. The date-of-death values for both the stock and cash portions of the lifetime bonus awards were discounted values, reflecting the fact that the amounts were not to be delivered until future years.The will made certain specific bequests of property, and devised the residue to the marital and residuary trusts created under the trust116 agreement. None of the rights to receive future installments of lifetime or postmortem bonus awards were subject to distribution as a specific bequest. All these rights to installments of bonus awards were administered as part of the residue of the estate and were subject to distribution to petitioner under the residuary clause of the will. The bonus plan and the stock option plan did not permit the assignment by a deceased employee's estate of the rights to receive future bonus installments except that the estate could transfer such rights to the party entitled to them as testamentary beneficiary or heir.During the administration of the estate, the executor made five separate distributions to petitioner of certain of the rights to receive cash or stock due in subsequent years as installments of lifetime bonus awards, and a distribution of the right to the final installment due under the postmortem bonus award. These six distributions included a December 30, 1970, 626 distribution of the right to receive 1,446 shares of General Motors stock on January 10, 1973; a December 30, 1970, distribution of the right to receive $ 73,500 on January 10, 1973; a December 21, 1971, distribution117 of the right to receive 1,446 shares of General Motors stock on January 10, 1974; a December 22, 1972, distribution of the right to receive 925 shares of General Motors stock on January 10, 1975; a December 22, 1972, distribution of the right to receive $ 57,090 on January 10, 1974; and a December 31, 1973, distribution of the right to receive 358 shares of General Motors stock on January 10, 1974. Each distribution of a right to receive future bonus installments was made prior to the year in which payment or delivery of the installment was due.To record these six distributions of the rights to receive bonus installments, the estate and petitioner each made book entries for deliveries or receipts of "accounts receivable." No other act of transfer occurred between the estate and petitioner.Each of the distributions of the rights to future bonus installments was treated by the estate and petitioner in essentially the following manner. With respect to each right that was distributed, the present value of the right was determined as of the date of distribution. The estate claimed a distribution deduction for this amount on its U.S. Fiduciary Income Tax Return, Form 1041. Petitioner118 reported on its U.S. Fiduciary Income Tax Return, Form 1041, for the year of distribution the same value as gross income received from the estate. In each of the years in which rights to bonus installments were distributed, the estate had distributable net income, as defined in section 643, consisting primarily of bonus installments actually received by the estate in that year. 3 For each year, the amount of distributable net income exceeded the total of the correct date-of-distribution value of rights to future bonus installments plus the amount of cash distributions which were made in each of these years to the marital trust.In the subsequent years, when the bonus installments were due, General Motors paid them directly to petitioner. Petitioner 627 reported on its income tax return as ordinary income only the amount, if any, by which119 the bonus installment paid to it by General Motors exceeded the corrected value of the right to the bonus installment as of the date the right was distributed to it. 4 Due to fluctuations in stock prices, two of the bonus installments had values lower than the bases previously assigned to the rights to these installments. Petitioner claimed no losses in these instances. The estate did not include in income any portion of the bonus installments that were paid directly to petitioner.120 The following description of the treatment by the estate and petitioner of the stock portion of the distribution on December 30, 1970, illustrates how the distributions of the rights were treated. On December 30, 1970, the executor distributed to petitioner the right to receive future payment and delivery of the bonus installment of 1,446 shares of General Motors common stock which was payable and deliverable by General Motors to the estate on January 10, 1973. Both the estate and petitioner used $ 92,941 as the value as of December 30, 1970, of this bonus right. The estate claimed a distribution deduction of $ 92,941 on its income tax return, and petitioner reported $ 92,941 on its income tax return. The trustee subsequently made an adjustment on the books of petitioner to increase the reported present value of the right distributed to it as of December 30, 1970, from $ 92,941 to $ 108,242, which was the correct present value of the right as of December 30, 1970. On January 10, 1973, General Motors paid the installment due on that date by delivery of the 1,446 shares of common stock to petitioner. As of this date, the total fair market value of the 1,446 shares was $ 119,476. 121 Petitioner reported on its 1973 income tax return $ 11,234 as a receipt of ordinary income. This amount represented the difference between the fair market value of the stock on January 10, 1973 ($ 119,476), and the corrected December 30, 1970, present value of the right to 628 receive the stock ($ 108,242). The estate reported no gain or income with respect to this payment either in 1973, when the installment of the bonus award was paid to petitioner, or in any other year.Respondent examined petitioner's income tax returns for the years 1973, 1974, and 1975, and determined deficiencies in each of these years. When the notice of deficiency was issued to petitioner on September 6, 1979, petitioner had no right to file for refund with respect to the years 1970, 1971, and 1972. It has been respondent's position that the distribution of the rights to the lifetime and postmortem bonus installments were income in respect of a decedent, that receipt of these installments did not give petitioner any basis in these rights, and that petitioner therefore had to include as income the entire amount of each bonus installment when paid to it. In computing the amounts of deficiencies, 122 respondent did not allow any deductions under section 691(c) for estate taxes paid with respect to the lifetime bonus awards. On brief, respondent concedes that to the extent petitioner must include in its gross income items of income in respect of a decedent, a deduction under section 691(c) should be allowed for the Federal estate tax paid with respect to such income. Respondent also states on brief that if the Court finds that the contested bonus installments were income in respect of a decendent, then the maximum tax rates under section 1348 will apply in computing the amounts of deficiencies owed by the petitioner.Characterization of the Bonus Payments as Income in Respect of a DecedentThe first question we must resolve is whether the bonus payments were income in respect of a decedent under section 691.In its answering brief, petitioner for the first time suggests that installment payments of the contingent credits awarded under the stock option plan might not constitute income in respect of a decedent. However, in paragraph 6(1) of its amended petition, petitioner conceded that the rights to the installment payments of the lifetime bonus awards were rights to 123 income in respect of a decedent, and the case was initially briefed by both parties on this basis. Petitioner cannot now 629 raise a new issue by arguing contrary to the conceded facts. See, e.g., Sicanoff Vegetable Oil Corp. v. Commissioner, 27 T.C. 1056">27 T.C. 1056, 1065-1066 (1957), revd. on another issue 251 F.2d 764">251 F.2d 764 (7th Cir. 1958).We are, however, squarely faced with the issue whether payments of the postmortem bonus award were income in respect of a decedent. Petitioner argues that Mr. Rollert had no right or entitlement to a bonus award with respect to his employment in 1969 since the bonus was not formally awarded by General Motors until March 2, 1970 -- over 3 months after his death. We disagree. For purposes of section 691, we believe that as of the date of his death, Mr. Rollert had a right to a bonus award for 1969, in view of General Motors' established practices in awarding bonuses and its tentative decisions to assign substantial funds to the bonus pool for 1969 and to award bonuses to all executive vice presidents.Section 691(a) provides that gross income of an estate shall include all income in respect of 124 a decedent, but nowhere in the Code is this phrase defined. The only definition appears in section 1.691(a)-1(b), Income Tax Regs., 5 but this definition does little to clarify the meaning of the term. Thus, the courts have frequently been called upon to establish the dimensions of the term. Estate of Peterson v. Commissioner, 74 T.C. 630">74 T.C. 630, 638 (1980), affd. 667 F.2d 675">667 F.2d 675 (8th Cir. 1981).125 In determining whether particular receipts should be treated as income in respect of a decedent, courts have focused on whether the decedent had a right or entitlement to receive income as of the date of his death. Estate of Peterson v. Commissioner, 667 F.2d at 679, and cases cited therein. The 630 parties have stipulated in this case that Mr. Rollert "had no rights to the post-mortem bonus award during his lifetime." Respondent takes the position that for purposes of the stipulation, the term "rights" should be read as referring to contract rights or other legally enforceable rights, and that the stipulation establishes only that the decedent had during his lifetime no legally enforceable right to an award not yet made. Petitioner contends, however, that the stipulation establishes that decedent had no right or entitlement to the postmortem bonus and that the installment payments of this bonus were therefore not income in respect of a decedent. We do not accept petitioner's view. Whether decedent had a right or entitlement to a bonus award for 1969 is a question of law, and it is well established that this Court may disregard a stipulation126 of law. Mead's Bakery, Inc. v. Commissioner, 364 F.2d 101">364 F.2d 101, 106 (5th Cir. 1966), affg. on this point a Memorandum Opinion of this Court. This is particularly so when facts are presented, as they have been in this case, that conflict with the suggested interpretation of the stipulation. Mead's Bakery, Inc. v. Commissioner, supra at 106; Jasionowski v. Commissioner, 66 T.C. 312">66 T.C. 312, 318 (1976).Petitioner relies on several cases that have applied the "right-to-income" or "entitlement" test in determining whether post-death payments constitute income in respect of a decedent. Estate of Peterson v. Commissioner, supra; Halliday v. United States, 655 F.2d 68 (5th Cir. 1981); Claiborne v. United States, 648 F.2d 448">648 F.2d 448 (6th Cir. 1981); Keck v. Commissioner, 415 F.2d 531">415 F.2d 531 (6th Cir. 1969), revg. 49 T.C. 313">49 T.C. 313 (1968); and Trust Co. of Georgia v. Ross, 392 F.2d 694 (5th Cir. 1967). We agree with petitioner that this test should be applied but find on the127 facts of this case that as of the date of his death, Mr. Rollert had a right or entitlement to a bonus for 1969.Keck v. Commissioner, supra, and Trust Co. of Georgia v. Ross, supra, were the first cases to squarely reject reliance on the "economic activity" test under which the inquiry had been limited to consideration of whether the significant economic activity giving rise to income received after death had been performed prior to death. These two opinions indicated that all facts should be examined to determine whether at the date of death the decedent had the right to the post-death payments. Trust Co. of Georgia involved proceeds from the sale of 631 property pursuant to a binding contract which decedent had executed prior to death. Although there were a few aspects of the transaction not completed by the date of death, the court found that these were not of such a scope as would negate the right possessed by decedent under the contract. In contrast, the Keck court was presented with a situation in which the occurrence of post-death contingencies would defeat the existence of a right to income. 128 The particular fact situation before the court in the Keck case involved the treatment of liquidation distributions from corporations in which decedent had owned stock. Prior to decedent's death, the corporations had agreed to sell their assets in pursuance of a contemplated liquidation, but the sale was not consummated until after the decedent's death. The Court of Appeals stressed that the sale of the stock was subject to a number of contingencies, such as prior Interstate Commerce Commission approval and the continued agreement of the majority shareholder. On these facts, the court found that decedent had neither the right nor the power to require the corporations to liquidate and thus did not possess, prior to his death, the right to receive any proceeds from the contemplated liquidation.In Claiborne v. United States, supra, the right-to-income or entitlement test was applied in the context of the sale of property on which the decedent had granted an option prior to her death. Because the decedent had died before the optionee paid her the purchase price, the court recognized that she was not entitled as a strict matter of law to the full 129 purchase price as of the date of her death. However, the court found that under State law the decedent had the right in equity to specific performance of the land purchase agreement at the full purchase price because the optionee had already taken full possession of the realty prior to the decedent's death. The Claiborne opinion holds that the right-to-income or entitlement test is satisfied when a decedent possesses as of the date of death a legal or equitable entitlement to income. It does not state, however, that the existence of a right enforceable at law or in equity is an absolute prerequisite to finding a pre-death entitlement to income.These three appellate opinions left considerable room for disagreement over exactly what constitutes a right or entitlement to income. However, Halliday v. United States, supra, 632 and Estate of Peterson v. Commissioner, supra, have clarified this test.In Halliday, the Fifth Circuit rejected the view that a legally enforceable right was necessary in order for income to be taxed under section 691. The court characterized the right-to-income test as simply a "more precise" definition of income130 in respect of a decedent, rather than as a repudiation of the line of cases that had found the existence of income in respect of a decedent in the absence of a legally enforceable right. It elaborated on the right-to-income test as follows:We find that for purposes of Section 691, a right to income arises where the evidence shows a substantial certainty that benefits directly related to the decedent's past economic activities will be paid to his heirs or estate upon his death, notwithstanding the absence of a legally enforceable obligation. * * [655 F.2d at 72.]The fact situation in Halliday was quite similar to that now presented to us. The Halliday court was asked to decide whether section 691 applied to life insurance renewal commissions received by the estate of an insurance agent after his death. The agent had no contractual right to the payment of these renewal commissions. Nevertheless, the insurance company had a longstanding policy of paying benefits at a set rate to the beneficiaries of a deceased agent, and this policy had been embodied in corporate resolutions. On the basis of these facts, the court found that the decedent131 had a right, albeit not necessarily a legally enforceable one, to post-death renewal commissions, and therefore that the benefits paid to his estate by the insurance company constituted income in respect of a decedent.The "substantial certainty" approach adopted in the Halliday opinion is consistent with the approach we took in Estate of Peterson v. Commissioner, supra.That case involved the tax treatment of sales proceeds under a contract for the sale of calves, which had been entered into by the decedent prior to his death. Based on our review of the case law and regulations, we found in Estate of Peterson that the following four requirements have been applied to test whether a decedent possessed the requisite right to sales proceeds at the time of death: (1) Whether the decedent entered into a legally significant arrangement regarding the subject matter of the sale; (2) whether the decedent performed the substantive acts required 633 as preconditions to the sale; (3) whether there existed at the time of decedent's death any economically material contingencies which might have disrupted the sale; and (4) whether the decedent would have eventually received the132 sales proceeds if he or she had lived. 6 We found that the proceeds from the contract for the sale of the calves satisfied three of these four requirements but did not satisfy the second requirement. Substantial and essential acts that the decedent had been required to perform under the contract had not been completed as of the date of his death since one-third of the calves were too young to be deliverable as of that date and had to be raised by the estate for more than 1 month thereafter. We therefore held that the sales proceeds were not income in respect of a decedent.We now apply to the facts of this case the right-to-income test as elaborated in Halliday v. United States, supra,133 and Estate of Peterson v. Commissioner, supra.General Motors had no contractual obligation as of the date of decedent's death to pay him a bonus with respect to 1969. However, the decedent had a longstanding contractual employment relationship with General Motors, and under the terms of his employment, he was eligible to participate in the bonus plan, which was a formalized deferred compensation arrangement and under which bonuses had been paid consistently in preceding years. In this factual context, it is apparent that the bonus payments were made in relation to "a legally significant arrangement" between the decedent and General Motors. See Estate of Peterson v. Commissioner, 74 T.C. at 639. It is also clear that decedent's 11-months employment with General Motors in 1969 and his refraining from taking any actions that would have disqualified him from bonus eligibility for that year constituted his performance of all the substantive acts required as a precondition of his being awarded a bonus for 1969. Cf. Estate of Peterson v. Commissioner, supra.When Mr. Rollert died, he had no legally enforceable right to a bonus for 1969 since the134 bonuses for that year had not yet been declared, and General Motors had reserved the right to 634 modify or suspend the bonus plan. However, as a practical matter, by the date of Mr. Rollert's death, and barring some unforeseen and unpredictable change in corporate plans, bonuses would be awarded for 1969. In each of the 13 years preceding 1969, General Motors had awarded bonuses. Prior to the date of decedent's death, it was anticipated that under the net earnings formula set forth in the plan, substantial funds would be added to the bonus pool for 1969. There is no evidence to suggest the committee ever considered exercising its discretion to modify or suspend the plan in 1969 or to reduce the amount added for 1969 below the amount computed under the net earnings formula. To the contrary, over 7 weeks before Mr. Rollert's death, the committee had made an initial determination of the amount available for bonuses for 1969.It is also clear that Mr. Rollert was assured prior to his death of being one of the individuals to whom awards would be made for 1969. The committee had never denied an award to an executive vice president, and Mr. Rollert had received bonuses in excess135 of $ 300,000 for each of the 5 years preceding 1969. More importantly, over 3 weeks before Mr. Rollert's death, the committee had made a determination (albeit a tentative one) to grant bonus awards for 1969 to all executive vice presidents. The parties agree that during 1969, Mr. Rollert committed no act that would have disqualified him from receipt of an award for that year. At least implicitly, the committee recognized this fact by failing to exclude him from the executive vice president group and the possibility of forfeiture died with the decedent. Although the tentative bonus determinations were subject to monthly reviews until March 2, 1970, in point of fact, the amount formally awarded on March 2, 1970, with respect to Mr. Rollert's employment during 1969 was substantially the same as the initially determined amount, except that it was reduced by 1/12th to reflect the fact that he performed no services for General Motors in December 1969.The bonus plan provided the committee with discretion in determining the eligibility of employees for consideration for bonuses in the year their employment terminated, but the existence of this discretion did not significantly affect 136 Mr. Rollert's chances of receiving a bonus for 1969. The committee had no written rules or guidelines circumscribing their 635 discretion with respect to terminated employees. However, the committee's established practice had been to make awards to terminated employees who were otherwise qualified so long as they had at least 2-months active service in the year for which the award was being granted. Halliday v. United States, supra at 72, paid particular attention to the fact that the corporation had consistently followed its established policy of paying post-death benefits even absent a contractual obligation. Here, it is equally clear that under established practices, the bonus award with respect to Mr. Rollert's service in 1969 would not have been denied on the basis of his cessation of employment in that year. 7 Thus, as of the date of Mr. Rollert's death, there was no material contingency comparable to that in Keck v. Commissioner, supra, that might have resulted in denial of a bonus award for 1969. 8 On these facts, it is established that Mr. Rollert had a substantial certainty as of the date oo his death137 of receiving a bonus award for 1969.138 Thus, the analyses in the Halliday and Estate of Peterson opinions lead us to the conclusion that as of the date of his death, Mr. Rollert had a right or entitlement to a bonus for 1969. Accordingly, the payments under the portmortem bonus award were income in respect of a decedent when received by the estate or petitioner.Distribution of Rights to Income in Respect of a DecedentWe must determine now whether the estate's distribution to petitioner of the rights to receive bonus installments in 636 subsequent years gave petitioner a basis in these rights equal to their fair market values when distributed, and whether such basis could be used by petitioner to reduce the income it received when the bonus installments were actually paid to it. This is a question of first impression.As a preliminary matter, we address petitioner's claim that respondent is estopped from contesting its treatment of the bonus rights because of his failure to question such treatment in earlier years. Petitioner points out that respondent failed to challenge the treatment by both the estate and petitioner of the transfers of the rights to bonus installments as distributions of the estate's139 distributable net income in the years the rights were transferred. This argument must be rejected, first of all, because it was raised for the first time on brief. Time and again this Court has reiterated that we will not consider issues not raised in the pleadings. See, e.g., Markwardt v. Commissioner, 64 T.C. 989">64 T.C. 989, 997 (1975); Estate of Mandels v. Commissioner, 64 T.C. 61">64 T.C. 61, 73 (1975); Frentz v. Commissioner, 44 T.C. 485">44 T.C. 485, 491 (1965), affd. without discussion of this issue 375 F.2d 662">375 F.2d 662 (6th Cir. 1967). Furthermore, even if the issue were properly before us, it is clear there is no basis for finding estoppel against respondent, here. There is no indication that respondent ever examined the estate tax return or petitioner's returns for the prior years. Also, it is a well-established principle that the Commissioner's failure to challenge erroneous treatment of an item in earlier years does not preclude an examination of the correctness of the treatment of such item for the tax years in issue. Automobile Club of Michigan v. Commissioner, 353 U.S. 180">353 U.S. 180, 183 (1957);140 DuPont Testamentary Trust v. Commissioner, 66 T.C. 761">66 T.C. 761, 765 (1976), affd. per curiam 574 F.2d 1332">574 F.2d 1332 (5th Cir. 1978).In resolving this case, we must analyze the relationship between the rules of section 691 for the taxation of income in respect of a decedent and those of subchapter J, part I, governing the income taxation of estates. In general, the provisions of subchapter J, part I, are designed to allocate between the estate and its beneficiaries taxable income received by the estate, so that income will be taxed at only one level. For an estate that may accumulate income, such as Mr. Rollert's estate, this general allocation scheme is accomplished 637 through the distribution rules of sections 661 through 663. Section 691 serves a totally different purpose. It is designed to deal with the problem of how to tax income that has been earned but not received by an individual as of the date of his or her death. Under section 691, income that has accrued to a decedent prior to death but has not yet been received is not included in the decedent's final income tax return, even though the right to such income may be included141 on the estate's estate tax return. Instead, the income is reported when received by the person who actually receives the income. See Estate of Sidles v. Commissioner, 65 T.C. 873">65 T.C. 873, 879 (1976), affd. without published opinion 553 F.2d 102">553 F.2d 102 (8th Cir. 1977).Here, petitioner used the distribution rules of section 662 in an attempt to reduce the income taxed to it under section 691. In effect, what petitioner did here was to report part of the payments of income in respect of a decedent as income under section 662, even before the payments were made by General Motors. When the payments were actually made in subsequent years, petitioner excluded the previously reported amounts from its section 691 income. Because the treatment of payments of income in respect of a decedent in this manner would completely undermine the mandate of section 691 that the recipient of such income report it for the year when received, we agree with respondent that petitioner had no right to reduce its income in respect of a decedent in the year it received the bonus payments by the amounts it had previously reported as income under section 662.Section142 691(a)(1)9143 provides that the amount of all items of income in respect of a decedent shall be included in gross 638 income, for the taxable year when received. This rule applies to income in respect of a decedent received by (A) the decedent's estate if it has acquired from the decedent the right to receive such income; (B) a person who has acquired, by reason of the decedent's death, the right to receive such income if the right to receive such income was not acquired by the decedent's estate from decedent; and (C) a person who has acquired the right to receive the amount by bequest, devise, or inheritance from the decedent, after a distribution by the decedent's estate of such right. See also sec. 1.691(a)-2(a), Income Tax Regs. In this case, subparagraph (A) required Mr. Rollert's estate to include in income amounts received with respect to those rights to bonus installments that it did not distribute to petitioner, and subparagraph (C) required petitioner to include those bonus installments that it received with respect to rights the estate had distributed to it. 10Under section 661(a), an estate deducts in computing its taxable income (1) any amount of income required to be distributed currently and (2) "any other amounts properly paid or credited or required to be distributed for such taxable year." However, the total amount of these deductions may not exceed the estate's distributable net income. 11 Under section 662, the beneficiary to whom these distributions are made must include in gross income a corresponding amount. 12Sections 661(b) and 662(b) are designed to assure that the character of the amounts deducted by the estate and taken into income by the beneficiary is proportionate to the character of items entering 144 into the computation of distributable net income.Petitioner and the estate applied the distribution rules of 639 sections 661 and 662 to the distribution of the rights to receive subsequent bonus installments. With respect to each bonus right it distributed, the estate deducted the entire fair market value of the right as a distribution of its distributable net income. Petitioner took this same amount into income and used it as its basis in the right to the bonus installment. The character of petitioner's 145 income was determined under sections 661(b) and 662(b) by reference to the character of the estate's distributable net income rather than by reference to the character of the bonus, itself.Petitioner treated section 691 as coming into play only when the actual payments of the bonus installments were made. It treated each bonus payment as income when received but only to the extent, if any, that the amount paid to it exceeded the basis it had previously assigned the bonus right.Petitioner claims that the distribution to it of the rights to the bonus installments falls squarely within the literal language of sections 661(a)(2) and 662(a)(2) as "amounts properly paid or credited." Since the rights were irrevocably transferred to petitioner and had an acknowledged value to it at the time of distribution, which was taken into income as a distribution from the estate, the distribution appears on its face to fall within the ambit of these provisions. However, the terms "amounts properly paid or credited" would be excessively broad if read literally. Thus, these words must be interpreted in the light of the statutory framework and overall legislative objectives of subchapter J. Mott v. United States, 199 Ct. Cl. 127">199 Ct. Cl. 127, 462 F.2d 512">462 F.2d 512, 517 (1972);146 Estate of O'Connor v. Commissioner, 69 T.C. 165">69 T.C. 165, 178 (1977).In characterizing the distribution of the rights to the bonus installments as amounts properly paid or credited, petitioner placed particular reliance upon section 1.661(a)-2(c) and (f), Income Tax Regs. 13 Section 1.661(a)-2(c) specifies that the term 640 "any other amounts properly paid or credited or required to be distributed" includes a distribution of property in kind, which petitioner believes includes the distribution here of the rights to the bonus installments. Section 1.661(a)-2(f)(2), Income Tax Regs., states that, in determining the amount deductible by the estate and includable in gross income of the beneficiary, the property distributed in kind is taken into account at its fair market value at the time it was distributed, credited, or required to be distributed. 14 There is no dispute in this case as to the fair market values of the rights on the dates of distribution. Section 1.661(a)-2(f)(3) provides that to the extent the fair market value of the property is included in a beneficiary's gross income, the beneficiary takes such amount as its basis for the property. 147 149 Respondent points out that the assigning of tax basis to the rights to income in respect of a decedent has enabled petitioner to escape income taxation on much of the income payable under those rights. In each year in which the rights to the bonus installments were distributed, the estate had distributable net income consisting primarily of bonus payments actually 641 received by it in that year. The estate retained part of this income, but offset this action by distributing to petitioner rights to bonus installments that had not yet been paid to the estate. Because it treated the transfers of the rights as distributions of distributable net income, the estate's deduction for distributions of distributable net income included the date-of-distribution values of the bonus rights. The estate thereby reduced its taxable income by carrying its distributable net income out to petitioner, 15 even though it retained much of the income it had received. Petitioner increased its income in the years of distribution by taking into income the date-of-distribution values of the bonus rights, in other words, the discounted value of the future installments of income. However, by assigning150 basis under section 1.661(a)-2(f)(3), Income Tax Regs., to these rights, its income was reduced by the same amounts in the later years when the bonus installments were actually paid, except with respect to two installments of stock which had declined in value between the date the rights were awarded and the dates the installments were paid, in which case the reduction in income was limited by the value of the stock when the installments were paid. Thus, for the bonus rights that increased in value between the dates of distribution and receipt, the net effect of the treatment of the bonus rights by petitioner and the estate was to reduce the aggregate taxable income of the estate and petitioner by the fair market values of the bonus rights as of the dates of distribution. 16 For the two stock installments that declined in 642 value during this period, aggregate taxable income was reduced by the values of the stock when paid to petitioner.151 We therefore agree with respondent that the approach taken by petitioner and the estate allowed substantial sums of income to escape taxation.17Section 691 and its legislative history evince a clear purpose to tax income in respect of a decedent in the same manner as if it had been received by the decedent. Allowing the escape from taxation suggested by petitioner would undermine this purpose. In this respect, we believe the following language from Commissioner v. Linde, 213 F.2d 1">213 F.2d 1, 5-6 (9th Cir. 1954), which we quoted with approval 643 in Estate of Sidles v. Commissioner, 65 T.C. 873">65 T.C. 873, 879 (1976), affd. without opinion 553 F.2d 102">553 F.2d 102 (8th Cir. 1977), is instructive:there is nothing in the legislative history or in the text of Sec. 126 [the 1939 I.R.C. predecessor to section 691] to indicate that it was intended to be anything other than an improved device to accomplish the general purpose of the internal revenue code that all income should pay a tax and that death should not rob the United States of the revenue which otherwise it would have had. * * [Fn. ref. omitted.]* * * *152 it is our view that section 126 was but an improved method adopted by Congress in aid of its continuing effort to avoid the loss of tax upon income merely because of the death of the decedent who would have paid a tax upon the same economic returns had he lived to receive them.153 Petitioner would have us accept its taking into income under section 662(a) the value of the bonus rights when distributed as satisfying the objective of section 691 to tax all income in respect of a decedent to the actual recipient of the income. Petitioner is correct that the overall amount of income reported by it under either section 662(a) or section 691 was similar to the amount it would have reported had it not treated the receipt of the rights to future bonus installments as distributions of the estate's distributable net income. However, as we have explained above, the aggregate amount of income reported by the estate and petitioner was substantially reduced by petitioner's approach since the distributions of the rights to future bonus installments were treated as carrying out to petitioner the estate's distributable net income. The estate thereby reduced its reported income and was able to accumulate funds which could subsequently be paid out, tax-free, to petitioner, the residuary legatee.For this reason, we do not believe that petitioner's reporting income under section 662 when it received the rights to subsequent bonus installments should be treated as satisfying154 the requirement that the recipient report all income in respect of a decedent. Furthermore, even if we were to assume that petitioner's treatment of the bonus rights and installments satisfied the requirement of section 691 that income in respect of a decedent be taxed to the recipient of such income, we see no way that it could also satisfy the timing and characterization rules of that section.Section 691(a)(1) requires income in respect of a decedent to 644 be included in income "for the taxable year when received." It is designed to defer taxation of these amounts until actual receipt. Were we to accept petitioner's view that its reporting income when the rights to bonus installments were distributed satisfied the objective that it be taxed on the income in respect of a decedent, it would be apparent that the timing rule had been violated. Under petitioner's approach, the only income deferred until actual receipt would be the excess of the amount received over the amount reported in the year the right was distributed.Section 691(a)(3) requires the character of income in respect of a decedent to be the same as it would have been in the hands of the decedent if the155 decedent had lived and received such income. Here, however, only that income actually reported in the year of receipt as income in respect of a decedent took its character under section 691(a)(3). The character of the rights to income in respect of a decedent that were distributed was determined under section 662(b) by reference to the character of the estate's distributable net income. Thus, it is apparent that petitioner's approach would also cripple the characterization rule for income in respect of a decedent.It is a well-accepted principle of law that a specific statute controls over a general one, even if the latter might otherwise appear to govern. Bulova Watch Co. v. United States, 365 U.S. 753">365 U.S. 753, 758 (1961); Estate of O'Connor v. Commissioner, supra at 178; Essenfeld v. Commissioner, 37 T.C. 117">37 T.C. 117, 122-123 (1961), affd. 311 F.2d 208">311 F.2d 208 (2d Cir. 1962). As we have explained, there is an apparent conflict between section 691 and the distribution rules of sections 661 and 662. In view of the nature of section 691 as a specific statutory scheme for the taxation156 of income in respect of a decedent, which would be largely defeated were rights to income in respect of a decedent allowed to acquire basis under the distribution rules, we believe section 691 must take precedence, here.Although the legislative history of section 691 and the regulations under that section do not specifically address the issue presented in this case, they do tend to support our conclusion that sections 661 and 662 should not be applied to an estate's distribution of rights to income in respect of a decedent. Example 1 of section 1.691(a)-2(b), Income Tax Regs., which illustrates the application of the general principle of 645 taxing income in respect of decedent, when received, involves a fact situation quite similar to that now before us. A decedent was entitled to salary payments in five annual installments after his death. The estate collected the first two payments and then distributed to the residuary legatee the right to the remaining three installments. The example states that the estate must include the first two installments in its gross income and the legatee must include the subsequent three installments in his gross income. This example does157 not even refer to the possibility of the right to the final three installments being treated as a distribution governed by sections 661 and 662. If the distribution rules were meant to apply to distributions of rights to income in respect of a decedent, the absence of any reference to this effect in the regulation is incomprehensible.The current rules in section 691 for the taxation of income in respect of a decedent are derived primarily from section 126, I.R.C. 1939, which was added by section 134 of the Revenue Act of 1942, 56 Stat. 831. The legislative history of that provision clearly states Congress'intent that amounts of income in respect of a decedent --be treated, in the hands of the persons receiving them, as income of the same nature and to the same extent as such amounts would be income if the decedent remained alive and received such amounts. [S. Rept. 1631, 77th Cong., 2d Sess. (1942), 2 C.B. 504">1942-2 C.B. 504, 580.]At several points, the Senate report indicates the provision was designed to place the recipient of the income in respect of a decedent in the same position as the decedent with respect to both the amount and character of income. 158 Nothing in the legislative history of the Internal Revenue Code of 1954, which introduced the distribution rules of sections 661 and 662, indicates any congressional desire to change the requirement that income in respect of a decedent be taxed in the same manner as it would have been treated if it had been received by the decedent, himself. The decedent would normally report for tax purposes each installment as received, with the full 646 installment being included as income. The provisions of the legislative history cited by petitioner 18 do not indicate otherwise. All that these provisions are concerned with is the general rule of sections 661 and 662 that all distributions are deductible by the estate and includable by the beneficiary when distributed. They do not deal, however, with the question before us now of whether a distribution of rights to income in respect of a decedent is a distribution subject to sections 661 and 662.159 Contrary to petitioner's contention, the changes made when the Internal Revenue Code of 1954 was enacted actually support respondent. H. Rept. 1337, 83d Cong., 2d Sess. 64, A218-A219 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 87-88, 373-374 (1954). Congress extended section 691(a)(1) so that it applies to rights to income in respect of a prior decedent that are acquired by a beneficiary from a second decedent. As an example of how this provision works, the committee reports mention a widow who was entitled to receive insurance renewal commissions but who died before receiving such commission income. Under the pre-1954 law, the fair market value of the right to receive the commissions had to be included in the widow's final income tax return, even though she left to her son the right to receive the commissions. Congress explained that section 691 was being expanded so that no income would be realized on the transfer to the widow's estate of the right to income from the prior decedent. The commissions earned by the prior decedent should be taxed to the recipient upon receipt and their character determined by reference to the prior decedent. These results outlined in the reports160 under the post-1954 law could not be obtained if petitioner's theory were accepted, since petitioner would treat the distribution from the estate of the prior decedent to the widow as a distribution of a right to income in respect of a decedent, which would require the widow to recognize income and would create a basis in the right to receive future commissions. The rights to the commission income had necessarily been distributed from the estate of the prior decedent to the widow, and under petitioner's theory, the widow would 647 have reported the fair market value of such rights when they were distributed to her and taken such value as her basis in the rights. Nowhere do the committee reports even intimate that this might be the proper treatment.We address finally petitioner's contention that its treatment of the bonus rights did not defeat the overall scheme of section 691, since section 1.661(a)-2(f), Income Tax Regs., forgives any income tax on the appreciation in value of property in kind distributed by an estate or trust. 19 It is apparent that this regulation does cause the nonrecognition of some unrealized appreciation. However, there are several key distinctions161 between the nonrecognition sanctioned by this regulation and the situation before us now. First of all, petitioner has assumed that the difference between the value of a right to income in respect of a decedent and its basis can properly be labeled as appreciation. However, the right to income in respect of a decedent is the right to compensation income, which was already earned by the decedent and became nonforfeitable upon his death. This is simply income that has been earned but not yet reported, and thus cannot be seen as constituting appreciation in the value of property. Any increase in the value of bonus rights resulted from the fact that they were initially discounted because of the delay that had to be borne until the recipient could actually enjoy receipt of the income.More importantly, petitioner's analogy to appreciated property is misplaced because it fails to consider that162 section 1014(a) generally allows a step-up in basis to the date-of-death valuation for property acquired from a decedent, while section 1014(c) denies a basis step-up for rights to income in respect of a decedent. Petitioner's approach would allow an escape from income taxation for all income in respect of a decedent represented by the value of the right to such income when distributed. This would have the effect of allowing a step-up in basis for increases in value of rights to income in respect of a decedent occurring before the decedent's death, as well as those occurring between the date of death and the date of distribution. Thus, petitioner's interpretation of section 648 1.661(a)-2(f), Income Tax Regs., sees respondent as having allowed by regulation what was specifically denied by statute under section 1014(c), i.e., a step-up basis to the date-of-death value for rights to income in respect of a decedent.We hold as a general principle that section 691 overrides sections 661 and 662 and precludes the assignment of a basis to a right to income in respect of a decedent when that right is transferred by an estate to a legatee. Therefore, we find in this case that petitioner163 improperly offset against its income in respect of a decedent, basis previously assigned to the rights to the bonus installments. Because the lifetime bonus installments were included in the gross estate, in computing petitioner's income tax liability relative to the contested bonus installments, a deduction under section 691(c) should be allowed for the Federal estate tax the estate paid with respect to the rights to these installments.Decision will be entered under Rule 155. Footnotes1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended.↩2. The fair market values of the stock when distributed were $ 25,258 for 1970; $ 29,408 for 1971; $ 27,935 for 1972; $ 29,497 for 1973; and $ 16,738 for 1974.↩3. The estate reported distributable net income on its income tax returns in the amounts of $ 450,562 for 1970; $ 420,915 for 1971; $ 376,895 for 1972; and $ 107,247 for 1973.↩4. For three of the rights to bonus installments, petitioner used a different value than the amount it had reported on its income tax return in the year the right was distributed. This difference is due to the fact that the values initially determined and used on its returns were incorrect and were subsequently adjusted on petitioner's books to the corrected amounts. There is nothing in the record, however, to indicate that petitioner filed amended returns to correct its initial use on its Forms 1041 of incorrect values for the rights to future bonus installments that it received and treated as income.↩5. Sec. 1.691(a)-1(b), Income Tax Regs., provides:(b) General definition. In general, the term "income in respect of a decedent" refers to those amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent. See the regulations under section 451. Thus, the term includes:(1) All accrued income of a decedent who reported his income by use of the cash receipts and disbursements method;(2) Income accrued solely by reason of the decedent's death in case of a decedent who reports his income by use of an accrual method of accounting; and(3) Income to which the decedent had a contingent claim at the time of his death.See secs. 736 and 753 and the regulations thereunder for "income in respect of a decedent" in the case of a deceased partner.↩6. In Estate of Peterson v. Commissioner, 74 T.C. 630">74 T.C. 630, 639 n.9 (1980), affd. 667 F.2d 675">667 F.2d 675↩ (8th Cir. 1981), we cautioned that the four factors were not meant to be an ironclad formula but might change based on the type of transaction to be analyzed.7. We note that had General Motors deviated from its established policy of treating terminated employees with at least 2-months service in the award year, in the same manner as continuing employees, and thereby denied decedent's bonus award for 1969, it may be that the estate could have sued to obtain the award. Compare Hainline v. General Motors Corp., 444 F.2d 1250 (6th Cir. 1971), in which the court found that the bonus committee's discretion to allow terminated employees to receive accrued bonus awards was restricted by its past decisions, and for that reason, the committee could not arbitrarily deny the right to receive such accrued bonuses but must examine the facts of the particular case, with Parrish v. General Motors Corp., 137 So. 2d 255">137 So. 2d 255↩ (Fla. App. 1962), in which the court held that General Motors had discretion under the bonus plan in granting or withholding bonus awards to its employee.8. We note that although the Sixth Circuit did not use the term "substantial certainty" in Keck v. Commissioner, 415 F.2d 531">415 F.2d 531 (6th Cir. 1969), revg. 49 T.C. 313">49 T.C. 313 (1968), the effect of the court's stressing the contingencies affecting the sale of the stock which gave rise to the liquidation proceeds shows that it took the same practical approach as the Fifth Circuit did in Halliday v. United States, 655 F.2d 68">655 F.2d 68↩ (5th Cir. 1981).9. Sec. 691(a)(1) provides:(a) Inclusion in Gross Income. -- (1) General rule. -- The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent;(B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or(C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.↩10. Sec. 691(a)(2)↩, which requires income to be recognized upon the "transfer" of a right to receive income in respect of a decedent, does not apply to this case since "transfer" is defined specifically to exclude transfers, such as those involved in this case, to a person entitled to receive the right to income in respect of the decedent by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.11. Distributable net income is computed under sec. 643 by making specified adjustments to the estate's taxable income. Respondent does not challenge the correctness of the particular amounts of distributable net income reported by the estate in 1970, 1971, 1972, and 1973, the years in which rights to bonus installments were distributed.↩12. Sec. 663 lists various types of distributions that are not considered distributions subject to secs. 661 and 662↩, but none of the sec. 663 exclusions apply here.13. Sec. 1.661(a)-2(c), Income Tax Regs., provides in pertinent part:(c) The term "any other amounts properly paid or credited or required to be distributed" includes all amounts properly paid, credited, or required to be distributed by an estate or trust during the taxable year other than income required to be distributed currently. Thus, the term includes the payment of an annuity to the extent it is not paid out of income for the taxable year, and a distribution of property in kind (see paragraph (f) of this section). * Sec. 1.661(a)-2(f), Income Tax Regs., provides:(f) If property is paid, credited, or required to be distributed in kind:(1) No gain or loss is realized by the trust or estate (or the other beneficiaries) by reason of the distribution, unless the distribution is in satisfaction of a right to receive a distribution in a specific dollar amount or in specific property other than that distributed.(2) In determining the amount deductible by the trust or estate and includible in the gross income of the beneficiary the property distributed in kind is taken into account at its fair market value at the time it was distributed, credited, or required to be distributed.(3) The basis of the property in the hands of the beneficiary is its fair market value at the time it was paid, credited, or required to be distributed, to the extent such value is included in the gross income of the beneficiary. To the extent that the value of property distributed in kind is not included in the gross income of the beneficiary, its basis in the hands of the beneficiary is governed by the rules in sections 1014 and 1015 and the regulations thereunder. * *↩14. In his answer to par. 6(1) of the amended petition, respondent admitted lifetime bonus installments were "property rights to income in respect of the decedent." Petitioner suggests that this is a concession by respondent that the bonus rights were "property" and thus subject to sec. 1.661(a)-2(f), Income Tax Regs. However, respondent specifically denied in the same paragraph that the transfer from the estate to petitioner resulted in an income tax basis in the bonus rights. In view of respondent's consistent argument that these rights are not subject to the distribution rules of secs. 661 and 662, because sec. 691 governs, it is clear respondent did not concede that sec. 1.661(a)-2(f), Income Tax Regs., applied to these bonus rights. We note that we are not concerned here with a dispute as to whether rights to income in respect of a decedent constitute property for sec. 661 purposes. At least in some contexts, rights to income in respect of a decedent are property for tax purposes. Indeed, sec. 1014(c) refers to "property which constitutes a right to receive an item of income in respect of a decedent," and the congressional report relating to the predecessor of sec. 691 distinguishes between the decedent's right to income and his "other property." S. Rept. 1631, 77th Cong., 2d Sess. (1942), 2 C.B. 504">1942-2 C.B. 504, 580. We simply do not reach this issue in view of our holding that sec. 691 takes precedence over secs. 661 and 662↩.15. During 1970 through 1973, the distributions of the bonus rights were used to carry out over $ 400,000 of the estate's distributable net income.↩16. The following examples illustrate the escape from taxation caused by petitioner's treating the distribution of a right to income in respect of a decedent (IRD) as a distribution of distributable net income (DNI).EXAMPLE A (right to IRD not distributed):Fact - Year 1:Estate has DNI of $ 50,000. No DNI distributed. Year 2:Estate has no DNI except for IRD of $ 30,000. After receiving the $ 30,000, estate distributed it to legatee. Tax treatment -Year 1:$ 50,000 income to estate; no income to legatee. Year 2:$ 30,000 income to legatee; no income to estate. EXAMPLE B (right to IRD distributed in year 1 and treated as DNI distribution):Facts - Year 1:Estate has DNI of $ 50,000. No DNI distributed except that right to IRD payable in year 2 is distributed to legatee. Present value of this right to IRD is $ 28,000. Year 2:Estate has no DNI. The $ 30,000 of IRD is paid directly to legatee. Tax treatment -Year 1:$ 22,000 income to estate; $ 28,000 income to legatee. Year 2:No income to estate; $ 2,000 income to legatee (i.e., $ 30,000 IRD minus basis of $ 28,000). COMPARISON:↩IncomeIncomeAggregate incometo estateto legateeto estate and legateeExample A$ 50,000$ 30,000$ 80,000Example B22,00030,00052,000 $ 28,000 (Amount escaping taxation) 17. Commentators who have examined the tax consequences of an estate's distribution of rights to income in respect of a decedent have generally recognized that application of the distribution rules of secs. 661 and 662 would allow substantial sums to escape taxation. But they also recognize that a literal reading of secs. 661 and 662 and the regulations thereunder would allow this result. Some of the commentators believe these provisions of the Code and regulations must be interpreted as inapplicable to the distribution of rights to income in respect of a decedent. See 2 A. Casner, Estate Planning 804-805 (1980); M. Ferguson, J. Freeland & R. Stephens, Federal Income Taxation of Estates and Beneficiaries 533-534 (1970); Rammel, "'Income in Respect of Decedent' Provisions Lend Themselves to Postmortem Estate Planning," 7 Tax'n for Acct. 358, 361 (1971). Others have concluded, however, that the distribution of the rights to income in respect of a decedent should be accepted as "amounts distributed" for purposes of secs. 661 and 662. See Quigley, "The IRS's Position on Income in Respect of a Decedent," 121 Tr. & Est. 15 (1982); Wilf, "Planning for Distributions of Property-in-Kind After the Tax Reform Act," 12 Inst. on Est. Plan., sec. 1612(1978); "Income in Respect of a Decedent," 5 Real Prop. Prob. & Tr. J. 307">5 Real Prop. Prob. & Tr. J. 307, 309↩ (1970).18. H. Rept. 1337, 83d Cong., 2d Sess. 60, A198 (1954); S. Rept. 1622, 83d Cong., 2d Sess. 84, 348 (1954).↩19. See generally M. Ferguson, J. Freeland & R. Stephens, Federal Income Taxation of Estates and Beneficiaries 525-533 (1970).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620953/	LOUIS J. CANALE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentCanale v. CommissionerDocket Nos. 9090-78, 3671-79.United States Tax CourtT.C. Memo 1981-79; 1981 Tax Ct. Memo LEXIS 659; 41 T.C.M. (CCH) 948; T.C.M. (RIA) 81079; February 24, 1981. Louis J. Canale, pro se. Lewis J. Abrahams, for the respondent. TANNENWALDMEMORANDUM FINDINGS OF FACT AND OPINION TANNENWALD, Judge: Respondent determined deficiencies in petitioner's income tax in the amounts of $ 1,232.10 for the taxable year ended December 31, 1975, and $ 1,848.16 for the taxable yearended December 31, 1976. Some of the facts have been stipulated and are found accordingly. Petitioner resided in Brooklyn, N.Y., at the time he filed his petition herein. He filed his income tax returns for the taxable years involved with the Brookhaven Service Center. On his 1975 return,petitioner claimed a $ 4,200 deduction for taxes, broken down into allowed and disputed categories, as follows: Allowed perItemized deductionAmount pernotice ofAmount infor taxesreturndeficiencydisputeState and local income$ 2,600.00$ 1,585.04$ 1,014.96Real estate520.000520.00State and local gasoline520.0083.00437.00General sales560.00330.00199.00Totals$ 4,200.00$ 1,998.04$ 2,170.96660 On his 1976 return, petitioner claimed a $ 5,500 deduction for taxes,broken down into allowed and disputed categories, as follows: Allowed perItemized deductionAmount pernotice ofAmount infor taxesreturndeficiencydisputeState and local income$ 3,600.00$ 1,876.00$ 1,724.00Real estate620.000620.00State and local gasoline620.000620.00General sales660.00461.00199.00Totals$ 5,500.00$ 2,337.00$ 3,163.00On his returns, petitioner deducted medical expenses of $ 754.00 for 1975 and $ 854.00 for 1976, which respondent disallowed and petitioner now concedes. On his returns, petitionerdeducted interest expense of $ 1,400 for 1975, which respondent disallowed and which was not put in issue by petitioner. The burden of proof was on the petitioner. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. When the case was called for trial, petitioner offered no evidence to support any of the disallowed deductions, although he was given every opportunity to do so. 1 Accordingly, he has failed to carry his burden of proof, and respondent's determinations661 must be sustained. Decision will be entered for the respondent. Footnotes1. The record indicates that some of the taxes, which petitioner purportedly paid, were taxes for which his mother-in-law was obligated. Payment of otherwise deductible taxes which are not the obligation of a taxpayer are not deductible. Pounds v. United States,372 F.2d 342">372 F.2d 342, 352 (5th Cir. 1967); Cramer v. Commissioner,55 T.C. 1125">55 T.C. 1125, 1130(1971); sec. 1.164-1(a), Income Tax Regs.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474600/	Laro, J., concurring in result: I concur only because I am uncomfortable with the analysis used by the majority in arriving at its result. That analysis applies a new test that the majority has created to decide whether a transfer to a family limited partnership should be respected for Federal tax purposes. The majority applies its test in lieu of deeply ingrained caselaw that conditions satisfaction of the “bona fide sale for an adequate and full consideration in money or money’s worth” exception of section 2036(a) (adequate and full consideration exception) on the transferor’s receipt of property equal in value to that of the property transferred by the transferor. In other words, under that caselaw, the adequate and full consideration exception may apply only where the transferor’s receipt of consideration is of a sufficient value to prevent the transfer from depleting the transferor’s gross estate. The majority states its test as follows: “In the context of family limited partnerships, the bona fide sale for adequate and full consideration exception is met where [1] the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership, and [2] the transferors received partnership interests proportionate to the value of the property transferred.” Majority op. p. 118. I disagree with both prongs of this test. I believe that a transferor satisfies the adequate and full consideration exception in the context of a transfer to a partnership only when: (1) The record establishes either that (i) in return for the transfer, the transferor received a partnership interest and any other consideration with an aggregate fair market value equal to the fair market value of the transferor’s transferred property, or (ii) the transfer was an ordinary commercial transaction (in which case, the transferred property and the consideration received in return are considered to have the same fair market values), and (2) the transfer was made with a business purpose or, in other words, a “useful nontax purpose that is plausible in light of the taxpayer’s [transfer- or’s] conduct and useful in light of the taxpayer’s economic situation and intentions.” ACM Pship. v. Commissioner, T.C. Memo. 1997-115, affd. in part and revd. in part on an issue not relevant herein 157 F.3d 231 (3d Cir. 1998); see also CMA Consol., Inc. v. Commissioner, T.C. Memo. 2005-16; Salina Pship., L.P. v. Commissioner, T.C. Memo. 2000-352. 1. Majority’s Conclusion That Transferors Receive Partnership Interests Proportionate to the Value of the Property Transferred Where the record establishes the existence of a legitimate and significant nontax reason for creating a family limited partnership, the majority concludes that the adequate and full consideration exception is met if the transferors received partnership interests proportionate to the value of the property transferred. I disagree with this conclusion. Section 2036(a) provides: SEC. 2036(a). General Rule. — The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death— (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. [Emphasis added.] Firmly established caselaw holds that the emphasized text, the adequate and full consideration exception, is satisfied only when a transferor receives consideration in money or money’s worth equal to the value of the property transferred by the transferor; i.e., consideration with a value sufficient to prevent the transfer from depleting the transferor’s gross estate. E.g., Estate of Wheeler v. United States, 116 F.3d 749, 761 (5th Cir. 1997) (“unless a transfer that depletes the transferor’s estate is joined with a transfer that augments the estate by a commensurate (monetary) amount, there is no ‘adequate and full consideration’ for the purposes of either the estate or gift tax”); Estate of D’Ambrosio v. Commissioner, 101 F.3d 309, 312 (3d Cir. 1996) (“consideration should be measured against the value that would have been drawn into the gross estate absent the transfer”), revg. 105 T.C. 252 (1995); United States v. Past, 347 F.2d 7, 12 (9th Cir. 1965) (“The value of what the decedent received under the trust must be measured against the value of the property she transferred to the trust”); United States v. Allen, 293 F.2d 916, 917-918 (10th Cir. 1961) (consideration is “adequate and full” only if it equals or exceeds the value of the property that would otherwise be included in the gross estate absent the transfer); Estate of Frothingham v. Commissioner, 60 T.C. 211, 215-216 (1973) (“unless replaced by property of equal value that could be exposed to inclusion in the decedent’s gross estate, the property transferred in a testamentary transaction of the type described in the statute must be included in his gross estate”); see also Commissioner v. Wemyss, 324 U.S. 303, 307 (1945); Estate of Gregory v. Commissioner, 39 T.C. 1012 (1963). The adequacy of consideration for purposes of the adequate and full consideration exception is measured by the value of the property that would have otherwise been included in the transferor’s gross estate had the transferor died immediately before the transfer. Estate of D’Ambrosio v. Commissioner, supra at 313. Because transfers of assets under facts similar to those here are typically motivated primarily (if not entirely) by testamentary concerns, section 2036(a) preserves the integrity of the Federal estate tax system by preventing a depletion of an estate by testamentary-like inter vivos transfers for less than an adequate and full consideration. See United States v. Estate of Grace, 395 U.S. 316 (1969). Whether the value of consideration received in the form of an interest in a partnership is “adequate and full” within the meaning of section 2036(a) is a valuation issue. For this purpose, I believe that the Court must determine the fair market value of the partnership interest as of the date of the transfer, applying the well-established valuation principles that take into account discounts and/or premiums inhering in that fair market value.1 The value of the transferred property that would have been included in the transferor’s gross estate absent the transfer would have been determined under such a valuation approach. I believe it only natural to conclude that the same approach should apply to determine the value of the consideration that would have replaced the transferred property in the transferor’s gross estate had the transferor died immediately after the transfer. Moreover, the phrase “adequate and full consideration” has the same meaning in both gift and estate tax cases, Merrill v. Fahs, 324 U.S. 308, 309-311 (1945); Estate of Friedman v. Commissioner, 40 T.C. 714, 718-719 (1963), and this Court has previously applied such a valuation approach in a gift tax case, Estate of Trenchard v. Commissioner, T.C. Memo. 1995-121, arising under section 2512(b) from a transfer of property to a corporation upon its formation.2 In Estate of Trenchard, the decedents (husband and wife), their daughter, and her three children (the six of whom are collectively referred to as the subscribers) each transferred property to a newly formed corporation in exchange for debt and stock; the decedents’ daughter and her three children were the only ones who received common stock. The Court determined that the fair market value of the property that each decedent transferred to the corporation exceeded the fair market value of the stock and debt that they each received in return. The Court determined the fair market value of that stock, noting that a marketability discount inhered in it and that a premium for control also inhered in the fair market value of the decedent/husband’s shares. Consistent with the test applied in this case by the majority, the executrix argued that the excess values were not gifts from each of the decedents to the common shareholders because the decedents’ proportionate interests in all of the property transferred to the corporation did not exceed their interests in the total consideration that the subscribers had received in return. The Court disagreed. The Court held that the excess values were a gift from the decedents to the common shareholders in that the excess values accrued to the benefit of the common shareholders and increased the value of the interests received by them. With but a passing reference to language in Estate of Stone v. Commissioner, T.C. Memo. 2003-309, the majority declines to address whether valuation discounts are taken into account for purposes of valuing the consideration received by decedent from the Bongard Family Limited Partnership (bflp). See majority op. p. 117. Nor does the majority mention that this referenced language was recently rejected by a majority of a panel of the Court of Appeals for the Third Circuit in Estate of Thompson v. Commissioner, 382 F.3d 367, 386-387 (3d Cir. 2004) (Greenberg, J., concurring and joined by Rosenn, J.),3 affg. T.C. Memo. 2002-246. This majority in Estate of Thompson (Thompson majority) “[rejected] Stone on the quoted point [the referenced language] as the Commissioner’s position [that the valuation of partnership interests for purposes of section 2036(a) must take into account valuation discounts] in no way reads the [adequate and full consideration] exception out of section 2036(a) and the Tax Court does not explain why it does.” Id. The Thompson majority went on to explain that the Commissioner merely “seeks to apply the exception precisely as written as his position should not be applied in ordinary commercial circumstances even though the decedent may be said to have enjoyed the property until his death.” Id. at 387. The majority in this case does not address the Thompson majority’s conclusion that valuation discounts may be taken into account for purposes of the adequate and full consideration exception. Nor does the majority in this case attempt to answer the Thompson majority’s query as to why applying valuation discounts for such a purpose reads the adequate and full consideration exception out of section 2036(a). I recognize that the Court of Appeals for the Fifth Circuit in Kimbell v. United States, 371 F.3d 257, 266 (5th Cir. 2004), stated that valuation principles should not be equated with the test of “adequate and full consideration” because business or other financial considerations may enter into a transferor’s decision to receive an interest in a limited partnership that may not be immediately sold for 100 cents on the dollar. While I do not disagree that these considerations may cause a transferor to accept such an interest in a partnership, the issue as I see it is whether the inability to realize the 100 cents is attributable to (1) an actual difference in value between the transferred and received properties or (2) the presence of one or more intangible assets the sales price of which is subject to dispute. Under the caselaw referenced above, the adequate and full consideration exception does not apply where a difference in value between transferred and received properties causes a depletion in the transferor’s gross estate. Nor does Kimbell v. United States, supra, hold otherwise. As the Thompson majority observed as to Kimbell: Kimbell does not take into account that to avoid the recapture provision of section 2036(a) the property transferred must be replaced by property of equal value that could be exposed to inclusion in the decedent’s gross estate * * * on a money or money’s worth basis. [Estate of Thompson v. Commissioner, supra at 387 n.24 (Greenberg, J., concurring and joined by Rosenn, J.); citations and quotation marks omitted.] 2. Majority’s Conclusion That the Record Establishes the Existence of a Legitimate and Significant Nontax Reason for Creating a Family Limited Partnership Where the transferors received family limited partnership interests proportionate to the value of property transferred to the partnership, the majority concludes that the adequate and full consideration exception is satisfied if there was a legitimate and significant nontax reason for creating the partnership. I disagree with this conclusion for three reasons. First, I disagree with the use of the majority’s “legitimate and significant nontax reason” test. See majority op. p. 118. I would apply the longstanding and well-known business purpose test of Gregory v. Helvering, 293 U.S. 465 (1935). Indeed, the Court of Appeals for the Third Circuit used that business purpose test in Estate of Thompson v. Commissioner, supra at 383, when it stated: A “good faith” transfer to a family limited partnership must provide the transferor some potential for benefit other than the potential estate tax advantages that might result from holding assets in the partnership form. Even when all the “i’s are dotted and t’s are crossed,” a transaction motivated solely by tax planning and with “no business or corporate purpose ... is nothing more than a contrivance.” Gregory v. Helvering, 293 U.S. 465, 469 (1935). * * * The Court of Appeals for the Eighth Circuit, the court to which an appeal of this case would most likely lie, also has regularly used a business purpose/economic substance test in Federal tax matters, e.g., IES Indus., Inc. v. United States, 253 F.3d 350 (8th Cir. 2001); Bergman v. United States, 174 F.3d 928 (8th Cir. 1999), including matters dealing with estate and gift taxes, e.g., Estate of Schuler v. Commissioner, 282 F.3d 575 (8th Cir. 2002), affg. T.C. Memo. 2000-392; Sather v. Commissioner, 251 F.3d 1168 (8th Cir. 2001), affg. in part and revg. in part on the applicability of accuracy-related penalties T.C. Memo. 1999-309. Second, the words “legitimate” and “significant” are ambiguous and subject to various interpretations. For example, as I read the meaning of the adjective “legitimate” in Merriam-Webster’s Collegiate Dictionary 665 (10th ed. 1999), I am unsure which of those meanings the majority intends to give to that word. The only possible meanings are: “2 : being exactly as purposed: neither spurious nor false”; “3 a : accordant with law or with established legal forms and requirements”; and “4 : conforming to recognized principles or accepted rules and standards”. An uncertainty in the meaning of the words “legitimate” and “significant” may result in applications not intended by the majority. Third, the majority requires only that the creation of the partnership be supported by a legitimate and significant nontax reason. Under the majority’s analysis, therefore, the adequate and full consideration exception would seem to be satisfied as to all property transferred to a partnership as long as the record establishes the requisite legitimate and significant nontax reason and that the transferors received partnership interests proportionate to the value of the transferred property. Where, as here, the legitimacy of a partnership is not at issue,4 I do not believe that the Court’s analysis should rest solely on the transferor’s reason for forming the partnership; the Court’s analysis should also include an inquiry as to the business purpose for the transfers to the partnership. In fact, as I read the relevant text underlying the adequate and full consideration exception, that text speaks only to a “sale” of property and makes no specific statement as to the purchaser of that property. Marvel, J., agrees with this concurring in result opinion. The Court need not determine this fair market value, however, if the record establishes that the partnership interest was received in an ordinary commercial transaction. In that case, the values of the transferred and received properties would be considered to be equal. See sec. 25.2512-8, Gift Tax Regs, (transfers “made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth”); see also Estate of Harper v. Commissioner, T.C. Memo. 2002-121. As is true in sec. 2036(a), sec. 2512(b) refers to “value” and “adequate and full consideration in money or money’s worth”. Specifically, sec. 2512(b) provides: SEC. 2512. VALUATION OP GIFTS. (b) Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. I have found no law setting the precedential value of a concurring opinion that garners a second vote so as also to be a majority opinion of a Court of Appeals panel. Cf. Hunt v. Natl. Broadcasting Co., Inc., 872 F.2d 289, 296 (9th Cir. 1989) (recognizing the issue, but stating that it was unnecessary to decide there). To my mind, such a concurring opinion is entitled to the same respect as any other majority opinion of a panel. See Greene v. Massey, 706 F.2d 548, 550 (5th Cir. 1983) (in response to certification from the U.S. Court of Appeals for the Fifth Circuit, the Supreme Court of Florida answered that a concurring opinion by a Justice of that Court is the law of the case if joined by a majority of that Court’s Justices); Detroit v. Mich. Pub. Utils. Commn., 286 N.W. 368, 379 (Mich. 1939) (“It is true that the views of Justice Fellows were expressed in a separate concurring opinion. Views, however, expressed in separate concurring opinions are the views of the court, when it appears that the majority of the court concurred in such separately expressed views”); Anderson v. Sutton, 293 S.W. 770, 773 (Mo. 1927) (“Views expressed in a separate concurring opinion of an individual judge are not the views of the court, unless it appears that the majority of the court concurred in such separately expressed views”); see also State v. Dowe, 352 N.W.2d 660, 662 (Wis. 1984) (“In Outlaw [State v. Outlaw, 321 N.W.2d 145 (Wis. 1982)], the lead opinion represents the majority and is controlling on the issues of the state’s burden and the existence of abuse of discretion by that circuit court. However, the concurring opinions represent the majority on the issue of the test to be applied and therefore control on this point”). The majority states that it is not deciding whether BFLP is a partnership that should be recognized for Federal tax purposes. Majority op. p. 126 n.11.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4474601/	Halpern, J., concurring in part and dissenting in part.1 I. Introduction I write separately to express my disagreement with the majority’s interpretation of the bona fide sale exception found in section 2036(a).2 The majority states: In the context of family limited partnerships, the bona fide sale for adequate and full consideration exception is met where the record establishes [1] the existence of a legitimate and significant nontax reason for creating the family limited partnership, and [2] the transferors received partnership interests proportionate to the value of the property transferred. * * * [Majority op. p. 118.] I believe that the majority has strayed from the traditional interpretation of the bona fide sale exception by incorporating into the exception an inappropriate motive test (“a legitimate and significant nontax reason”), and by concluding that a partnership interest “proportionate” to the value of the property transferred constitutes adequate and full consideration in money or money’s worth. II. Bona Fide Sale Exception A. Introduction Section 2036 is entitled “Transfers With Retained Life Estate”, and subsection (a) thereof provides the following general rule: SEC. 2036(a). General Rule. — The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death— (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom. [Emphasis added.] Thus, even if a transferor of property retains lifetime possession, enjoyment, income, or control of the property, the value of the property will not show up in her gross estate if the transfer was a bona fide sale within the meaning of the underscored language (the bona fide sale exception). With respect to at least that portion of the bona fide sale exception that requires “adequate and full consideration in money or money’s worth” (for short, sometimes, full consideration), the identical language appears in section 2512(b), which provides that a gift occurs when property is transferred for insufficient consideration.3 That language has the same meaning in the respective contexts of the gift tax and the estate tax. Estate of Friedman v. Commissioner, 40 T.C. 714, 718-719 (1963) (“[I]f the transfer under scrutiny is considered as made for an adequate and full consideration for gift tax purposes, it likewise is to be considered for estate tax purposes.”); see also Merrill v. Fahs, 324 U.S. 308, 311 (1945) (the gift and estate taxes are in pari materia and must be construed together). The gift-on-account-of-insufficient-consideration rule of section 2512(b) is construed in section 25.2512-8, Gift Tax Regs., which, in pertinent part, provides: SEC. 25.2512-8 Transfers for insufficient consideration. Transfers reached by the gift tax are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration to the extent that the value of the property transferred by the donor exceeds the value in money or money’s worth of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth. * * * Under that regulation, transfers of property reached by the gift tax include transfers where (and to the extent) the value of the property transferred by the donor exceeds the value in money or money’s worth (cash value) of the consideration given in exchange therefor.4 A presumption of full consideration arises, however, in the case of a transfer of property made in the ordinary course of business; i.e., a transfer that is “bona fide, at arm’s length, and free from any donative intent”. Id. One consequence of satisfying the ordinary-course-of-business test is that the inquiry as to full consideration is avoided (and the actual fair market value of the consideration given for the transferred property is irrelevant). B. Approach of the Majority On pages 106-107 of its report, the majority makes the following finding: On December 28, 1996, decedent signed a letter that was written by Mr. Fullmer and addressed to decedent’s children. The letter expressed some reasons for forming WCB Holdings and BFLP. The letter explained that the entities provided, among other things, a method for giving assets to decedent’s family members without deterring them from working hard and becoming educated, protection of his estate from frivolous lawsuits and creditors, greater flexibility than trusts, a means to limit expenses if any lawsuits should arise, tutelage with respect to managing the family’s assets, and tax benefits with respect to transfer taxes. * * * Mr. Fullmer was decedent’s estate planning attorney, see majority op. pp. 101-102, and among the reasons set forth by decedent for forming WCB Holdings, LLC (WCB Holdings) and the Bongard Family Limited Partnership (BFLP) are family gifts and the achievement of transfer tax benefits (read, “savings”). The transfer tax savings result from the loss in value (giving rise to a valuation discount) that petitioner claims accompanied decedent’s sequential packaging of (1) his Empak, Inc. (Empak), stock in WCB Holdings and (2) his WCH Holdings Class B units in BFLP. The lost value, of course, was not beyond reclamation: It would be restored if BFLP and WCB Holdings were unpacked, which seems likely once decedent’s interests in the two entities passed through decedent’s estate and the Empak shares became more liquid. The transfer tax savings that decedent admitted were his objective thus serve only to increase by the amount of those savings (less, of course, transaction costs, such as lawyer’s fees) the size of decedent’s estate passing into the hands of his heirs. The achievement of transfer tax savings evidences donative intent because such savings translate almost dollar for dollar into the enhancement of the net value that decedent could gratuitously transfer to family members. Consequently, the transfers to WCB Holdings and bflp (together, the transfers) were not free of donative intent. That being the case, the transfers were not, in the terms of section 25.2512-8, Gift Tax Regs., made in the ordinary course of business, and there is no presumption that either the WCB Holdings membership units received by decedent for his Empak shares or the 99-percent limited partnership interest in BFLP received by decedent for his WCB class B membership units constituted full consideration for those transfers. Id. Therefore, to establish that the transfers were for full consideration, petitioner must, for each transfer, establish that the value of the property transferred by decedent did not exceed the cash value of the property received by him. Id. By the explicit terms of section 25.2512-8, Gift Tax Regs., the resulting inquiry is limited to an economic calculus, and there is no room for any inquiry as to the transferor’s (decedent’s) state of mind. Yet the majority makes his state of mind critical: Decedent * * * received [an interest] in WCB Holdings proportionate to the number of Empak shares * * * [he] contributed. Although by itself this may not be sufficient evidence to meet the adequate and full consideration requirement, two additional facts do support such a finding. We have determined that the respective assets contributed by the members were properly credited to the respective capital accounts of each contributing member, and distributions from WCB Holdings required a negative adjustment in the distributee member’s capital account. Most importantly, we have found the presence of a legitimate and significant nontax business reason for engaging in this transaction. [Majority op. p. 124; emphasis added.] Certainly, decedent’s state of mind (i.e., his intent) is important in determining whether the ordinary-course-of-business exception applies (was the transfer “free of any donative intent”), but once it is determined that the transfer in question was not made in the ordinary course of business, intent is no longer relevant to the determination of whether the transfer was for full consideration. I also disagree with the implication of the majority opinion that, in the context of a transfer to an entity (here, transfers to both a limited liability company and a family limited partnership), the full consideration requirement can be met by a showing that the transferor received an entity interest (e.g., a limited partnership interest) proportionate to the value of the property contributed to the entity. While an inquiry as to proportionality may have some bearing on whether the transfer was in the ordinary course of business, within the meaning of section 25.2512-8, Gift Tax Regs, (e.g., was at arm’s length5), I fail to see how proportionality aids the inquiry as to whether the value of the property transferred exceeded the cash value of the consideration received in exchange. See id. Here, because of the presence of donative intent, the transfers cannot be considered in the ordinary course of business, as that term is used in section 25.2512-8, Gift Tax Regs., and proportionality is irrelevant. Finally, as I read the majority’s approach to the bona fide sale exception, the majority has added to the exception the requirement that the taxpayer show that the decedent’s transfer to the entity was motivated “by a legitimate and significant nontax purpose.” Majority op. p. 118.6 If, indeed, that is the majority’s approach, then even if an objective analysis indicates that the transferor received full consideration, the bona fide sale exception presumably would not be satisfied if a subjective analysis reveals that the transaction did not have a legitimate and significant nontax purpose. According to the majority, indicators of the lack of such purpose include (1) that the transferor stood on both sides of the transaction, (2) commingling of the transferor’s and the transferee’s funds, and (3) the failure of the transferor actually to make a transfer. Majority op. pp. 118-119. Certainly, the “bona fide sale” portion of the bona fide sale exception would exclude transfers that were shams or based on illusory consideration. See, e.g., Wheeler v. United States, 116 F.3d 749, 764 (5th Cir. 1997). Beyond that, however, so long as an objective analysis demonstrates that, in exchange for the transferred property, the transferor received consideration with at least an equal cash value, no depletion of the transferor’s wealth has occurred, and it is difficult to see any policy reason to bring back into the gross estate the value of the property transferred. As we reasoned in Estate of Frothingham v. Commissioner, 60 T.C. 211, 215-216 (1973) (emphasis added): [W]here the transferred property is replaced by other property of equal value received in exchange, there is no reason to impose an estate tax in respect of the transferred property, for it is reasonable to assume that the property acquired in exchange will find its way into the decedent’s gross estate at his death unless consumed or otherwise disposed of in a nontesta-mentary transaction in much the same manner as would the transferred property itself had the transfer not taken place. * * * In short, unless replaced by property of equal value that could be exposed to inclusion in the decedent’s gross estate, the property transferred in a testamentary transaction of the type described in the statute must be included in his gross estate. * * * See also Kimbell v. United States, 371 F.3d 257, 262 (5th Cir. 2004) (citing Wheeler v. United States, supra); Magnin v. Commissioner, 184 F.3d 1074, 1079 (9th Cir. 1999), revg. T.C. Memo. 1996-25; Estate of D’Ambrosio v. Commissioner, 101 F.3d 309, 312 (3d Cir. 1996), revg. and remanding 105 T.C. 252 (1995).7 C. Conclusion I would approach the question of whether the value of property transferred by a decedent is included in the gross estate on account of section 2036 by, first, determining whether the decedent retained lifetime possession, enjoyment, income, or control of transferred property. Only after answering that question in the affirmative would I proceed to determine whether the bona fide sale exception applies to the transfer. In determining whether the bona fide sale exception applies, I would first determine whether the transfer was made in the ordinary course of business, as that term is used in section 25.2512-8, Gift Tax Regs. If not, I would determine whether the transfer was made for full value (i.e., whether the value of the transferred property at most equaled the cash value of the consideration received therefor). If not, then I would find that the value of the transferred property was included in the value of the gross estate pursuant to section 2036. Motive would only play the limited role I have outlined above (i.e., determining donative intent for purposes of the ordinary-course-of-business test). III. Gift on Formation The foregoing analysis suggests that, in forming a family-owned entity (e.g., a family limited partnership), one or more of the transfers to the entity might be deemed gifts, within the meaning of section 2512, because the transfers were for insufficient consideration, within the meaning of section 25.2512-8, Gift Tax Regs. I believe that a transfer to a family-owned entity may constitute a taxable gift, even if the size of the entity interest received by each transferor is deemed proportional to the value of the property contributed by that transferor.8 Consider the following hypothetical situation:9 Father, son, and daughter (F, S, and D) join in the formation of a family limited partnership (FLP), father making the bulk of the total contribution and receiving a limited partnership interest, S and D making smaller contributions and receiving general and limited interests. Each transferor receives a percentage interest in profits, losses, and capital that is strictly proportionate to the value that each contributes (in relation to the total value contributed). Based on claims of lack of marketability, loss of control, and other value diminishing factors, each interest is accorded some loss of value (in comparison to the value of the property exchanged therefore). F’s will and other testamentary-type documents are executed contemporaneously with the partnership agreement. They disclose that F’s interest in FLP ultimately will pass to S, D, and their children. Does any of the transferors make a gift on account of his or her contribution to the partnership for an interest of lesser value? Most likely, S and D do not. The reason is that, in pertinent part, section 25.2512-8, Gift Tax Regs., provides: “[A] sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth.” From S’s and D’s viewpoints, the transfers to FLP are made in the ordinary course of business, at least as that term is used in section 25.2512-8, Gift Tax Regs. See Rosenthal v. Commissioner, 205 F.2d 505, 509 (2d Cir. 1953) (“even a family transaction may for gift tax purposes be treated as one ‘in the ordinary course of business’ as defined in * * * [the predecessor to section 25.2512-8, Gift Tax Regs.] if each of the parenthetical criteria is fully met”), revg. and remanding 17 T.C. 1047 (1951). For S and D, the transfers are motivated strictly by self-interest and are free from donative intent. They have agreed to form a partnership that they believe will serve as a vehicle for the delivery of F’s property to them and their children through a process whereby the transfer tax cost of the delivery will be substantially reduced through various valuation discounts. They agree to suffer a temporary loss of independence and control (and perhaps some loss of fair market value) in order to facilitate the reduction of transfer tax, the burden of which ultimately would fall on them. For them, the transfers are motivated by an acquisitive motive, not a donative motive. They make no gifts because they are deemed to have received full value under the ordinary-course-of-business test found in section 25.2512-8, Gift Tax Regs. So long as it can be shown that F’s contribution was not free of donative intent, the result is different for F. F’s purpose (not necessarily his sole purpose, but an important one) is to pass his property to his family with a reduction in transfer tax cost that translates dollar for dollar into an enhancement of the net value that the family will receive. F cannot, therefore, pass the ordinary-course-of-business test in section 25.2512-8, Gift Tax Regs., and, because of the valuation discounts claimed, cannot show full consideration. F, therefore, has made gifts within the meaning of section 2512 and section 25.2512-8, Gift Tax Regs. The measure of the gifts is not the transfer tax reduction but is the inadequacy of the cash value of the limited partnership interest that F received in consideration for his contribution to FLP. See sec. 25.2512-8, Gift Tax Regs. It is precisely that debasement in value that F sought to achieve as his means of generating the transfer tax saving, and it is appropriate that that be the measure of his gift. The fact that S, D, and their children may not realize the measure of F’s gift (the difference between the inside and outside value of F’s interest in flp) until, by bequests, they receive his interest is not an impediment to concluding that F made a gift. Section 25.2511-2(a), Gift Tax Regs., provides: Sec. 25.2511-2 Cessation of donor’s dominion and control. (a) The gift tax is not imposed upon the receipt of the property by the donee, nor is it necessarily determined by the measure of enrichment resulting to the donee from the transfer, nor is it conditioned upon ability to identify the donee at the time of the transfer. On the contrary, the tax is a primary and personal liability of the donor, is an excise upon his act of making the transfer, is measured by the value of the property passing from the donor, and attaches regardless of the fact that the identity of the donee may not then be known or ascertainable. In Commissioner v. Wemyss, 324 U.S. 303, 307 (1945), the Supreme Court said: “The section taxing as gifts transfers that are not made for ‘adequate and full (money) consideration’ aims to reach those transfers which are withdrawn from the donor’s estate.” The value discounts obtained by F on the transfer to FLP withdrew from his estate amounts that will (and are intended to) reappear in the hands of his heirs. Taxation of those amounts under section 2512 is appropriate. I concur with the majority insofar as it decides that the value of the shares of Empak, Inc., transferred by decedent to WCB Holdings, LLC (WCB Holdings), is not included in the value of the gross estate (although I do not agree with the reasoning the majority uses to reach that result). I disagree with the majority that the value of the WCB Holdings membership units transferred to the Bongard Family Limited Partnership is included in that value. I have not joined Judge Laro’s separate opinion because, in important particulars, I disagree with his stated views. Sec. 2512(b) provides: SEC. 2512(b). Where property is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the value of the property exceeded the value of the consideration shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. As we have recently said: “The meaning of the phrase ‘in money or money’s worth’, when it follows ‘adequate and full consideration’, has been interpreted to confine the scope of ‘consideration’ to money or its equivalent; i.e., to exclude a mere promise or agreement as consideration.” Abeid v. Commissioner, 122 T.C. 404, 409 n.7 (2004); see also sec. 25.2512-8, Gift Tax Regs. (“A consideration not reducible to a value in money or money’s worth, as love and affection, promise of marriage, etc., is to be wholly disregarded [in determining adequate and full consideration], and the entire value of the property transferred constitutes the amount of the gift.”). 1 do not wish to suggest that proportionality (as discussed in the text) is determinative that a transaction is at arm’s length. Unless a gift motive is conceded or some secret knowledge is presumed, I am not persuaded that a rational person dealing at arm’s length would ever knowingly exchange assets worth $300 for an interest in an entity worth $200, with no right to control the entity or compel a distribution of her share of the entity’s assets. As I see it, the addition of that separate test is not necessary here, since petitioner has not otherwise shown that the transfers satisfy the bona fide sale exception. Two commentators on the family limited partnership scene add the following with respect to meaning of the “bona fide sale” portion of the bona fide sale exception: Treas. reg. section 20.2036-1 indicates that the exception applies where there is “adequate and full consideration.” It does not mention any requirement that the sale also be a bona fide one. It does, however, cross-reference Treas. reg. section 20.2043-l(a), which does appear to contemplate the need to satisfy two conditions for the exception to apply: that the sale be a bona fide one and that the consideration be adequate. Nonetheless, the latter regulation is not inconsistent with the traditional (Wheeler’s [Wheeler v. United States, 116 F.3d 749, 764 (5th Cir. 1997)]) understanding of the exception. Its use of the phrase “bona fide” is obviously designed to do nothing more than make certain that the consideration was actually supplied and not an illusory one. Indeed, the last sentence of the provision confirms this reading. It provides that, if the value at the time of death of the transferred asset to be included under section 2036 (or similar section) exceeds the consideration received by the decedent, only the excess is included in the gross estate. The failure to require that the sale be a bona fide one to qualify for treatment under this last sentence makes it clear that it was intended to embrace the traditional understanding of the exception. Gans & Blattmachr, “Strangi: A Critical Analysis and Planning Suggestions”, 100 Tax Notes 1153, 1162, n.78 (Sept. 1, 2003). Judge Ruwe suggests a gift-on-formation analysis in his dissenting opinion in Estate of Strangi v. Commissioner, 115 T.C. 478, 496 (Ruwe, J., dissenting), affd. in part and revd. in part 293 F.3d 279 (5th Cir. 2002). The Estate of Strangi majority opinion, which I joined, rejects that possibility, at least on the facts presented, on the grounds that Mr. Strangi (the decedent) did not give up control of the assets he contributed to the family limited partnership (for a 99-percent limited partnership interest) and his contribution was allocated to his capital account: “Realistically, in this case, the disparity between the value of the assets in the hands of decedent and the alleged value of his partnership interest reflects on the credibility of the claimed discount applicable to the partnership interest. It does not reflect a taxable gift.” Id. at 490. Similarly, in Estate of Jones v. Commissioner, 116 T.C. 121, 128 (2001), we said: “All of the contributions of property were properly reflected in the capital accounts of decedent, and the value of the other partners’ interests was not enhanced by the contributions of decedent. Therefore, the contributions do not reflect taxable gifts.” The hypothetical and some of the following analysis are suggested by Professor Leo L. Schmolka. Schmolka, “FLPs and GRATs: What to do?”, 86 Tax Notes 1473 (Special Supplement, Mar. 13, 2000).	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620930/	Francis E. Fowler, Jr. v. Commissioner.Fowler v. CommissionerDocket No. 5850.United States Tax Court1945 Tax Ct. Memo LEXIS 193; 4 T.C.M. (CCH) 520; T.C.M. (RIA) 45176; May 16, 1945Jerome F. Duggan, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent. OPPERMemorandum Findings of Fact and Opinion OPPER, Judge: By this proceeding petitioner seeks a redetermination of deficiencies in his income tax for the years 1939, 1940, and 1941, in the amounts of $523.11, $19,588.81, and $64,639.38, respectively. Petitioner has conceded all the assignments of error for the taxable year 1939, and all other issues in controversy for the years 1940 and 1941, except (1) whether he is entitled to report his salary and commissions for those years on a community property basis, and (2) whether the income for 1941 of an enterprise alleged to have been transferred by petitioner to his three sons is attributable to194 petitioner. Findings of Fact Petitioner filed his Federal income tax returns for the year 1939 with the collector of internal revenue for the first district of Missouri, and for the years 1940, 1941, 1942, and 1943, with the collector of internal revenue for the sixth district of California. The Commissioner's notice of deficiency asserting the income tax deficiencies in controversy was issued from the internal revenue agent's office, St. Louis, Missouri. Petitioner was born in St. Louis, Missouri, in 1891 and attended school there. In 1916 he was married in St. Louis, spent his honeymoon in Bermuda, and has lived continuously with his wife ever since. They have three sons, Francis E. Fowler, III, Truman R. Fowler, and Philip E. Fowler, who became 23, 20, and 17 years of age, respectively, in 1940. About 1920 petitioner purchased a home comprised of ten rooms and three baths at 63 Kingsbury Place, St. Louis, Missouri, for $33,000. Petitioner's St. Louis home was furnished at a cost of not less than $7,000, some furnishings replaced and augmented from year to year. A part of the furnishings were gifts from his wife's family who were people of wealth. Petitioner has made improvements195 upon his home in St. Louis extending over a period of years. He has always kept the house completely furnished. He has never rented the house nor has anyone but petitioner and his family ever lived there. He listed the property for sale in 1939 with an agent in St. Louis who is now deceased. Petitioner and his family have lived in their St. Louis home from time to time while not traveling or stopping at the home maintained by petitioner at La Jolla, California. As late as November, 1944, petit oner and his wife were living in their St. Louis home. He has been listed in the St. Louis phone directory at 63 Kingsbury Place ever since he bought the house. Petitioner also owns other houses in St. Louis, Missouri, in addition to the one in which he and his family live. Petitioner has a chronic throat ailment for which specialists recommended a change of climate. Philip was ill with bronchitis in 1929 and the doctor prescribed a change of climate. In 1929 petitioner first visited California and at that time purchased a house at La Jolla, California. Petitioner and his family decided to spend more time at the California house, and in 1935 made a five-room addition thereto. Petitioner also196 acquired a 15-room house on adjoining property. The California home is built on a hillside facing the Pacific Ocean, and petitioner's property there covers several acres of ground, improved with shrubbery, trees, and flowers. There is no mail delivery to the house and any mail addressed to petitioner at La Jolla is delivered to a post office box number there in his name. In 1929 petitioner acquired a life membership in the La Jolla Beach and Yacht Club, and at that time he also purchased a large motor boat which he later sold. The club had swimming as well as boating facilities which were availed of by petitioner and his family and guests. In 1939 petitioner and his wife took some of their best silver and linen to La Jolla. La Jolla, California, until the recent influx of army camps, was a resort town where a number of families from St. Louis spent their vacations. It is 115 miles from Los Angeles and 15 miles from San Diego. Petitioner's family has a summer home in Michigan which petitioner has the right to use. He has not done so since 1928 and the place is now for sale. In 1858 petitioner's grandfather established a general insurance agency in St. Louis, Missouri. This business197 was continuously carried on by petitioner's father under the name of F. E. Fowler & Co. for 50 years prior to his retirement in 1930, at which time the business was given to petitioner who has continuously carried on such business of being insurance broker and agent under the same family name. The offices of the business are in the Pierce Building, St. LouisMissouri. Petitioner has never conducted any insurance business in the State of California, although the company did an insurance business all over the United States, including accounts in California. Petitioner became interested in the fruit extract business in 1926. He started a sole proprietorship under the name of The Caligrapo Company, which is an abbreviation for California Grape Products Company, with its business address in the Pierce Building, St. Louis, Missouri. Petitioner carried on experiments in St. Louis and California with various fruits and in connection therewith developed secret formulas for the making of flavoring extract concentrates. This business of producing flavoring extracts has been continuously carried on from St. Louis, Missouri, under the above trade name. The Southern Comfort Corporation was organized198 by petitioner in 1934, and engages in the manufacture of liquor products in St. Louis, Missouri. Its business address is Pierce Building, St. Louis, Missouri. It is controlled by petitioner who since its incorporation has been its president and general sales manager. The direct employees of Southern Comfort Corporation are all located in St. Louis, Missouri, and it carries on its selling business through individual representatives or brokers throughout the United States who sell its products on a commission basis in various designated territories. These commission men personally take up all important business matters with petitioner as president of Southern Comfort Corporation. They carry on correspondence with the corporation and petitioner at La Jolla, St. Louis, Los Angeles, and elsewhere, and personally confer with petitioner in California, St. Louis, and elsewhere. Petitioner and his sons have engaged in the hobby of collecting rare firearms and other weapons. Petitioner has a large and valuable collection assembled at his home in St. Louis. Petitioner also had specimens arranged in his home at La Jolla but found the sea air damaged them so he sent them to St. Louis. Petitioner199 has held himself out as a dealer in antiques, including the guns and English silver. He has articles out on consignment in St. Louis and in California. He has never sold any antiques at a profit. In the spring of 1936 petitioner's father died in a hospital at La Jolla, California. Funeral services were conducted in St. Louis, Missouri, reported in a local paper to be "at the home of F. E. Fowler, Jr., 63 Kingsbury Place" and the body was interred in the family plot in Calvary Cemetery, St. Louis. The estate of petitioner's father was administered by the St. Louis Union Trust Company of St. Louis, and a final settlement of $3.67 was made July 6, 1939. Petitioner's three sons attended grade school in St. Louis and on occasion went to school in California. They all finished their grade school education and completed their four years of high school in St. Louis, Missouri. The oldest son went to college in St. Louis and graduated from Washington University there in 1937. While there he made his home at 63 Kingsbury Place. The second son went to Colgate University in New York in 1940 and 1941. The youngest son was still going to high school in St. Louis, Missouri, during the year 1940. 200 He completed his high school education there in June of 1940. He later graduated from Colgate University in 1944. Except for the time they were attending college, the three sons lived at 63 Kingsbury Place, St. Louis, Missouri, during the taxable years 1940 and 1941. At times when the petitioner and his wife were not present the children were supervised by the oldest son or by an aunt in St. Louis. Sometimes they stayed with relatives in St. Louis. Petitioner and his wife have maintained a single bank account in California which is a personal joint checking account with a bank in La Jolla, and is used for living expenses. Salary checks from Southern Comfort were deposited in the account. It has been an active account for the past 15 years. Petitioner has always maintained bank accounts with local banks in St. Louis, including a business account for the insurance company, and during the years 1940 and 1941 he had personal accounts in two separate banks in St. Louis, and a joint personal account in a third St. Louis bank, against which his wife does not draw. His wife also has maintained a separate personal account with a fourth St. Louis bank. Petitioner has maintained and used charge201 accounts from the time of his marrlage to the present date with various stores in St. Louis. He also maintains charge accounts with stores in Los Angeles, San Diego, New York. Chicago, Philadelphia, and in Massachusetts. Petitioner travels extensively throughout the United States in connection with the business of Southern Comfort Corporation and his wife always accompanies him on such trips, as she has done since their marriage. He usually makes a trip across the United States about twice a year. He gave 63 Kingsbury Place, St. Louis, as his address when registering in hotels in the East during 1940 and 1941. Petitioner and his wife, since 1929. have each year spent part of their time in their home at St. Louis and part of their time in their home at La Jolla. Petitioner and his wife spent Christmas of the year 1941 at St. Louis. Petitioner has many life-long friends in St. Louis. Sometime after March, 1929, petitioner regarded Missouri as his legal residence. In 1939 he moved additional personal effects to California, built a concrete driveway at the California home, and made additional plantings there. Petitioner owned about six personal automobiles in addition to business202 cars in the years 1939 through 1941. Some of the personal cars carried Missouri plates and were kept in St. Louis, and others carried California license plates and others carried California license plates and were kept in La Jolla. Petitioner holds a California automobile operator's permit. Petitioner had a caretaker continuously in his home in St. Louis, and at the time of the hearing in late 1944 had a caretaker and gardener at the home in La Jolla. Their maids usually accompanied them on their trips between St. Louis and La Jolla, and in November, 1944, petitioner had two maids in his St. Louis home. Petitioner and his wife had been issued war ration books from the rationing boards of St. Louis and California. Petitioner made application for fuel oil in 1942 with the Fuel Oil Division of the City Ration Board for 63 Kingsbury Place. Petitioner registered for the draft in California. Petitioner has paid real property taxes to the City of St. Louis for each of the years 1940 and 1941. In 1940 he received an assessment notice for a Missouri state income tax deficiency for 1936, addressed to him at La Jolla. In 1939 petitioner's wife received a communication from the Missouri203 state auditor with reference to her 1936 income tax. In 1941 petitioner paid 1938 Missouri income tax, the statement having been sent him at La Jolla. In 1940 he made a California income tax return. Petitioner carries identification and credit cards on his person, including San Diego Yacht and La Jolla Beach Club cards; Chamber of Commerce of La Jolla; Blackstone and Drake Hotel cards issued to him as president of Southern Comfort of St. Louis; Los Angeles jewelry credit card; St. Louis Chamber of Commerce (in his name, but intended to be on behalf of Southern Comfort); social security and draft cards, giving California address; old permit to carry a gun giving St. Louis address; a membership card of a St. Louis Chapter of War Dads; an insurance identification card, which was about 18 years old, giving his St. Louis address; a Statler Hotel card, giving his St. Louis address; and a Coronado Hotel card, giving his St. Louis address, which has been periodically reissued to him. He is also a member of the University Club in St. Louis which has privileges in other cities. Petitioner did not vote in either St. Lou's. Missouri, or La Jolla. California, during the years 1938 to 1941, 204 inclusive. After establishing a home in California petitioner took steps to have his name removed from the jury list in St. Louis. From the time petitioner began filing individual Federal income tax returns and through 1938 he filed his returns with the collector of internal revenue, St. Louis, Missouri, giving his address as 63 Kingsbury Place. Petitioner filed a separate income tax return for the year 1939 on March 15, 1940, with the collector of internal revenue of St. Louis in which he listed 63 Kingsbury Place as his address. Petitioner and his wife each filed separate Federal income tax returns for the taxable year 1940 on March 6, 1941, with the collector of internal revenue. Los Angeles, California. in which they each included in their respective taxable income one-half of petitioner's reported salary and commissions from Southern Comfort Corporation and commissions from petitioner's insurance business. The income from petitioner's flavoring extract business for the year 1940 which was carried on under the trade name of The Caligrapo Company was not reported on a community property basis but was all included by petitioner in his taxable income for that year. On March 16, 1942, petitioner205 and his wife each filed separate Federal income tax returns for the taxable year 1941 with the collector of internal revenue, Los Angeles, California, in which they each included in their respective taxable incomes one-half of petitioner's reported net salaries and commissions from Southern Comfort Corporation and commissions from petitioner's insurance business. The returns for 1941 were notarized in St. Louis on March 12, 1942. Petitioner's three sons each filed individual Federal income tax returns for the year 1941 on March 14, 1942, with the collector of internal revenue, St. Louis, Missouri, in which returns they reported the income from The Caligrapo Company on an equal partnership basis. In each such return the respective sons gave their address as 63 Kingsbury Place. Petitioner was domiciled in the State of Missouri rather than the State of California during the taxable years 1940 and 1941. Petitioner experimented for many years with the product of fruit flavoring extracts and in 1926 he started selling his product which was then a non-alcoholic flavoring and operated under the trade name of The Caligrapo Company as a sole proprietorship. The business offices of The Caligrapo206 Company have at all times been maintained in the Pierce Building, St. Louis, Missouri. Its manufacturing plant was located at 319 Chestnut Street, St. Louis, and a laboratory was located in the home maintained by petitioner in La Jolla. About 1929 petitioner experimented with the planting of trees and shrubbery in California. He developed an extract concentrate from the fruits which was used to flavor non-alcoholic beverages. In 1934 petitioner discovered a secret formula from which he produced an alcoholic flavoring. This he transferred to Southern Comfort Corporation in exchange for stock. Petitioner developed a new formula that same year which he also conveyed to Southern Comfort. The flavoring was used in the blending and manufacturing of Southern Comfort, an alcoholic beverage. In the spring of 1941 Caligrapo announced the production of a superior flavoring concentrate, result of a new secret formula developed by petitioner's oldest son while he was being employed by The Caligrapo Company. He worked on it for almost a year. The experimental and research work was carried on at the plant in St. Louis and in California. The new product was a superior one in that it could be mixed207 by anyone, and did not require ingredients made non-obtainable by the war. The Southern Comfort Corporation did not know the secret process for the making of this concentrate. The concentrates in question were produced by The Caligrapo Company and sold principally to the Southern Comfort Corporation from 1934 through 1941 and were used by it in the manufacture of Southern Comfort. The sales of Caligrapo increased from $10,593.99 in 1939 to $25,928.73 in 1940, and $74,188.30 in 1941. In 1940 the cost of production was $16,844.03 and in 1941 the cost of production was $13,993.59. The selling price to Southern Comfort of the secret extract concentrate produced by Caligrapo was double that of the extract previously sold to Southern Comfort. Petitioner's three sons, two of whom were minors, aged 20 and 17, respectively, and were attending school in 1940, signed a "Partnership Agreement," dated January 1, 1941. The indenture was not signed by petitioner; it was not witnessed; and has not been placed on public record. It recited that "on December 10, 1940, FRANCIS E. FOWLER, JR., decided to give as a gift to his three sons, FRANCIS EDWIN FOWLER, III, TRUMAN RIDDLE FOWLER and PHILIP208 FOUKE FOWLER, a company known as the CALIGRAPO COMPANY, in equal shares and to them as a partnership * ." The assets and liabilities of Caligrapo on December 31, 1940, were listed as follows: AssetsAccounts Receivable$3,311.00Notes Receivable2,000.00Cash on deposit2,914.13Petty Cash15.60Exchange A/c - due from SouthernComfort99.63Factory Equipment151.90Insurance Unexpired96.83Merchandise Inventory1,806.28Loans Receivable, Southern Comfort480.96Loans Receivable, Emp.2.30Office Equipment152.36Traveling Expense - deferred (Cadil-lac)1,200.00Total Assets$12,230.99LiabilitiesInsurance Payable$ 52.72Philip Fowler, Photography,1940255.00Meyer Bros.20.10Polabs273.24Angosturas181.30Total Liabilities782.36NET WORTH$11,448.63The "Partnership Agreement" signed by the three sons reads in part as follows: "THIS INDENTURE made this 1st day of January, 1941, by and between Francis Edwin Fowler, III, Truman Riddle Fowler and Philip Fouke Fowler, IT IS MUTUALLY AGREED AND UNDERSTOOD by and between the respective parties hereto that they will become and remain partners in the209 business of the Caligrapo Company for a term of fifty (50) years from the date of these presents, if all of them shall so long live. "2.) It is further mutually agreed and understood by and between all the parties hereto, that the partnership shall terminate at the end of ten (10) years from the date of these presents, if any one of the partners shall desire its termination, and such partner or partners desiring the termination, shall give not less than six months previous notice in writing to the other partner or partners. "3.) It is further mutually agreed and understood by and between the respective parties hereto that the firm name of the partnership shall be THE CALIGRAPO COMPANY. "4.) It is further mutually agreed and understood by and between the respective parties hereto, the business of the partnership shall be carried on at the Pierce Building, St. Louis, Missouri, or at such other place or places as the partners shall hereafter determine. "5.) It is further mutually agreed and understood by and between the respective parties hereto, that all of them will at all times diligently apply themselves to the business of the partnership and carry on the same to the greatest210 advantage of the partnership and each individual member thereof. * * * "7.) It is further mutually agreed and understood by and between the respective parties hereto, that the capital of the partnership shall consist of the sum of $11,448.63, consisting of various property including cash on hand amounting to $2,929.93, which is contributed to the partnership in equal shares by the respective partners. * * * "12.) It is further mutually agreed and understood by and between the respective parties hereto, that the partners shall be entitled to the net profits arising from the said business, and remaining after the payments hereinbefore directed to be made thereout, in equal shares. * * * "14.) It is further mutually agreed and understood by and between the respective parties hereto, that the bankers of the partnership shall be the Boatmen's National Bank of St. Louis, or such other bank as the partners shall from time to time agree upon; and all partnership moneys (not required for current expenses) shall be paid into the account of the firm at the said bank at the end of every month. Each partner shall be at liberty to draw on the partnership account, 211 but only for the purposes of the partnership, or for the purposes mentioned in the next clause hereof [unavoidable partnership obligations], and only by drafts or checks upon such bank in the firm name." Under paragraph 17 of the "Partnership Agreement" it was provided that Francis E. Fowler, III, shall be manager of the business and paid an annual salary of $2,400 for his services. Under paragraph 22 of the indenture it was stated that each of the partners shall be entitled to one-third of the profits and that the losses shall be borne by each in the same proportion. Paragraph 24 of the indenture stated that the profits were to be credited on the books at the end of each year to the respective accounts of the three partners and "may be drawn out at pleasure." The instrument contained additional formal provisions with respect to the payment of partnership expenses, restrictions upon the powers of the partners to obligate the firm, maintenance of books of account, limitations upon the signing of checks and writings, and upon the right of the partners to engage in any other business or to divulge trade secrets. It also contained provisions with respect to the assignment of partnership212 interests and the division of funds in case of dissolution. Under paragraph 30 of the indenture it was provided that in the event of disagreement between the partners as to their rights or liability under the terms of the indenture, "such difference shall be determined and such instrument or instruments shall be settled by Francis E. Fowler, Jr., [petitioner] and his decisions shall be final as to the contents and interpretation of such instrument or instruments, and as to the proper mode of carrying the same into effect." Petitioner did not file a Federal gift tax return reporting the alleged gift of The Caligrapo Company to his three sons. For the month of January, 1941, and prior thereto petitioner and the cashier of Caligrapo, under a power of attorney, were solely authorized to issue checks against the bank account of Caligrapo with the First National Bank in St. Louis. On January 31, 1941, petitioner requested the First National Bank in St. Louis to transfer all funds then on deposit to the credit of his three sons, and on February 1, 1941, the bank advised petitioner that the funds had been so transferred. On and after February 1, 1941, each of petitioner's three sons213 or the cashier of Caligrapo was authorized to issue checks against the bank account of Caligrapo First National Bank. The Caligrapo Company opened a "partnership" general ledger book as of January 1, 1941, and set up capital accounts wherein the purported net worth of the business in the sum of $11,448.63 was evenly divided among petitioner's three sons. The Caligrapo Company for the year 1941 shows withdrawals of $3.00 and salary of $600 paid to Truman, withdrawals of $38.64 and salary of $600 paid to Philip, and withdrawals of $237.78, and salary of $2,400 paid to Francis III. No other withdrawals or disbursements of the earnings of Caligrapo for the year 1941 were made to the three sons of petitioner. During the years 1940 and 1941 Caligrapo had only one full-time employee and two part-time employees. Petitioner was not an employee. Opinion Petitioner claims to be domiciled in the community property state of California, and hence to have correctly computed his tax liability by including only half of the community income in his own return. That presents the first issue. There is no question that petitioner was originally a resident of St. Louis; that he owns a large residence214 there; that he has business interests in that city; that his children have attended school there, even during the years in question; and that he has retained St. Louis bank accounts and charge accounts. Petitioner urges that a large part of each year is spent in California. It also appears that he and his wife have spent a part of their time in St. Louis in every year. He points out that he has business quarters in California, and that he handles his affairs from there by correspondence and sometimes personal interviews, but it also appears that his business associates confer with him in St. Louis when he is there. It is shown that a caretaker has charge of the St. Louis home, but it also appears that when petitioner and his wife are absent from California a caretaker is also employed there. Petitioner registered for the draft in California but he and his wife have been issued war ration books both in Missouri and California and a fuel oil application for the St. Louis residence was made to the St. Louis Ration Board. Petitioner belongs to clubs and business organizations in California, but he also belongs to a club in St. Louis and to the St. Louis Chamber of Commerce. Petitioner215 did not vote in St. Louis in 1940 or 1941, the years in question, but neither did he vote in California. The California abode had been owned by petitioner for some time. It appears to have been in the nature of both a summer and winter resort. He had used it for annual visits of long duration in prior years and in fact there is some indication that he contends it was his domicile in years prior to 1936, although apparently throughout that period his income tax returns were filed in St. Louis. 1 At any rate we are not able to discern a tangible distinction between his conduct in 1939 when he claims to have taken up the new residence and the customary activities of other years both before and after. To indicate how neutral are all the circumstances, the question might be posed in the following form: Taking all the facts shown by the record, but omitting only petitioner's own statement as to his intention, would anyone be even mildly surprised216 to learn on those facts that he intended to retain the domicile in St. Louis? Since petitioner concedes that he was domiciled in Missouri up to 1939, since it is incontestable that one claiming a change of domicile has the burden and must meet it by a fair preponderance of the evidence, see Samuel W. Weis 30 B.T.A. 478">30 B.T.A. 478, 487, and since the mere statement of a wholly mental condition on petitioner's part is not only subject to the infirmities of a self-serving declaration but must in this type of case be accompanied by actions 2 which conform in tenor and coincide in time with the requisite mental attitude, Gilbert v. David, 235 U.S. 561">235 U.S. 561, it seems to us unanswerable that on this record the acts of petitioner are no less consistent with a retention of the Missouri domicile than with the acquisition of a new one in California and hence that at least for the years before us and on the present record it cannot be said that respondent erred in this respect. Shilkret v. Helvering (C.A.D.C.), 138 Fed. (2d) 925. 217 On the question of the income of the flavoring extract business, this proceeding seems to us less favorable to respondent's contention than any submitted by the parties as authority. In all of them the taxpayer concerned had retained an interest in the enterprise and a more or less unqualified management of it. Here petitioner completely eliminated himself from the business and as far as the record shows transferred it in its entirety to his three sons. It is perhaps arguable that the only one of them who was actually responsible for the subsequent operation of the venture or who made any real contribution to it was the oldest boy; it may even be that the other two brothers were no more than recipients of a share of the income. But if so, it was not income earned by petitioner either directly or indirectly, and we need not concern ourselves with the question of a proper distribution of the income for tax purposes among the three sons since none of them is here. Shortly after the transfer to petitioner's three sons a new formula, developed by the oldest boy, was substituted for the one previously used, and it appears that it was superior to the latter and was the exclusive property218 of the new partnership. But even if the circumstances in this respect were less auspicious and petitioner's company favored the new partnership with orders purely as a matter of partiality, we should not regard it as warranted to carry the "section 22(a)" argument so far as to hold that income which petitioner made it possible for his sons to earn was thereby converted into his own income. The portion of the deficiency dependent upon this issue is disapproved. Decision will be entered under Rule 50. Footnotes1. Internal Revenue Code, section 53(b)(1). "Returns * * shall be made to the collector for the district in which is located the legal residence or principal place of business of the person making the return * * ."↩2. " * * 'But mere residence elsewhere will not rebut the presumption as to continuance, unless it is inconsistent with an intent to return to the original domicile.'" Pietro Crespi, 44 B.T.A. 670">44 B.T.A. 670, 674↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620931/	G. M. HARRINGTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. L. W. MACDONALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Harrington v. CommissionerDocket Nos. 7709, 7710.United States Board of Tax Appeals10 B.T.A. 92; 1928 BTA LEXIS 4196; January 21, 1928, Promulgated 4196 The partnership relationship is not shown by the evidence to have existed among the petitioners and their wives during the taxable years. H. H. Tooley, Esq., for the petitioners. J. W. Fisher, Esq., for the respondent. TRAMMELL 92 These proceedings are for the redetermination of deficiencies in income taxes as follows: G. M. Harrington for 1920 in the amount of $6,309.03; for 1921 in the amount of $1,423.29. L. W. MacDonald for 1920 in the amount of $6,487.94; for 1921 in the amount of $1,401.02. The proceedings were consolidated and heard together as both involve the same issue, namely, whether the respondent erred in 93 taxing the net income of the partnership of MacDonald and Harrington for the taxable years to the two petitioners above named instead of to four persons, consisting of the petitioners and their wives, to whom the petitioners claim the net income should have been taxed. FINDINGS OF FACT. The petitioners are residents of San Francisco, Calif. On January 15, 1918, the two petitioners above named formed a partnership and engaged in the wholesale lumber business. No articles of partnership were drawn up, the4197 partnership agreement being oral. About the middle of 1919 the petitioners began to consider taking their wives into the partnership with them and they formed the intention of making their wives partners from the beginning of 1920 but no partnership agreement in writing was drawn up at that time. They consulted with an attorney with respect to taking their wives into the partnership and he advised that no written articles of partnership were necessary "so long as the partnership books reflected the interests of the partners and showed the actual interests and liabilities of all the partners, including their wives if they were taken in." No change whatever was made in the partnership books at the time the new partnership is alleged to have been formed in 1920 until the first withdrawals of profits were made by the respective wives of the petitioners. Neither during the years 1920 or 1921 nor at any time prior thereto were any articles of copartnership drawn and executed, but in 1924 a partnership agreement was executed by the two petitioners and their respective wives. This partnership agreement was dated January 1, 1920. During the years involved the firm letterheads and stationery4198 always carried the names of the two petitioners only as partners. Neither of the wives of the petitioners contributed anything to the partnership except that Mrs. Harrington advanced some money to the petitioner, Harrington, when he entered the partnership originally in 1918. The petitioner Harrington secured a one-half interest in the partnership at that time for such money as was put into the business by him, whether secured from his wife or money that he had on hand. No bill of sale or other instrument in writing was executed whereby any interest in the business was transferred to the petitioners' wives except the instrument which was executed in 1924. Neither of the wives of the petitioners took any active part in the conduct of the affairs of the business. Neither of them had any capital account on the books and no entries were made with respect to them except the profits which were credited to their account. The petitioners' wives 94 were given a check when they desired to withdraw any amounts credited to them. The checks could be signed only by one of the petitioners. No restriction was placed upon the amount of money that the wives of the petitioners could4199 withdraw so long as it did not exceed their credit balances, but for convenience it was agreed that they would draw a stipulated amount. A check for $300 was made out to them each month and this was later raised to $400 per month. OPINION. TRAMMELL: That husband and wife, under the law of California, may enter into relationship of partners and carry on business in that form is clear. Section 158, Civil Code of California. Under the law of that State no particular form of agreement is required to constitute the partnership. It was not questioned in this proceeding by the respondent that the petitioners had the right under the law of California to take their wives into the partnership with them, the only question being whether the partnership was actually formed and was in existence during the years 1920 and 1921 composed of the petitioners and their wives. The respondent has determined as a fact that the petitioners and their wives were not partners. The petitioners are required to introduce evidence to overcome the presumption of the correctness of the respondent's determination. In our opinion, there is not a preponderance of evidence to establish the partnership relation4200 among the petitioners and their wives. The wives took no part in the affairs of the business. There were no entries made upon the books with respect to the wives except the profits at the end of the years which were credited to their account. There is no evidence that the wives entered into the relationship of mutual agency with their husbands, or that their wives entered into such an agreement with the petitioners as to constitute them partners, and the actual conduct of the parties as well as the other evidence in the case leads us to the conclusion that the partnership was not formed until 1924, when the articles of copartnership were executed, notwithstanding the fact that this agreement was dated January 1, 1920. There is no testimony that this agreement executed in 1924 incorporated any verbal agreement which had theretofore been entered into. In view of the foregoing, it is our opinion that the partnership relationship did not exist among the petitioners and their wives during 1920 and 1921. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620934/	Estate of Annie Sells, Deceased, G. M. Sells and T. D. Sells, Executors, Petitioner, v. Commissioner of Internal Revenue, RespondentSells v. CommissionerDocket No. 12641United States Tax Court10 T.C. 692; 1948 U.S. Tax Ct. LEXIS 210; April 27, 1948, Promulgated 210 Decision will be entered under Rule 50. The decedent at the age of 78, without legal advice, wrote out in longhand her will, consisting of four paragraphs. In the third paragraph she said "I would like to set aside as an educational loan fund my Bank Stock in The Orange Nat. Bank, the dividend to be used to provide scholarship first to relatives or other Boys or girls" and "I wish that $ 200.00 hundred dollars per year be given for Missions, or where most needed to The First Methodist Church in Orange, Tex. The Pastor & Stewards as trustees." The decedent died in the following year on February 9, 1945. As a result of proceedings in the probate court the bank stock, having a value of $ 22,125, was turned over to a trustee by the executors to administer as a trust in perpetuity. The decedent was survived by 11 relatives of scholastic age. During the first 2 years the trustee collected $ 3,300 as dividends and paid out $ 400 to the church, $ 112.50 as trust fees, and 5 scholarships of $ 500 each to grandnephews and grandnieces of the decedent. Held, the value of the bank stock is deductible from the gross estate of the decedent under section 812 (d), I. R. C., as a bequest211 to a trustee to be used by such trustee exclusively for religious or educational purposes. Irl F. Kennerly, Esq., for the petitioner.D. Louis Bergeron, Esq., for the respondent. Black, Judge. BLACK 692 This proceeding is for a redetermination of a deficiency of $ 5,777.44 in estate tax. As shown in the statement attached to the deficiency notice, the deficiency is the result of three adjustments to the net estate, as follows:Addition to value of real estate$ 12,000.00Addition to value of stocks and bonds16,368.75Decrease in deduction for charitable bequests22,125.0050,493.75693 Petitioner, by appropriate assignments of error, contests the first and third adjustments. The first adjustment has been settled by stipulation (paragraph 9 of212 the stipulation of facts) and effect will be given thereto in the recomputation to be made under Rule 50. The third adjustment was explained in the statement attached to the deficiency notice as follows:Schedule NDeterminedReturnedItem 1$ 22,125.00It is held that this item is not a deductible one under the provisions of Section 812 (d) of the Internal Revenue Code, or any other provision of the Estate tax laws and regulations effective at date of decedent's death.FINDINGS OF FACT.The facts as stipulated are so found.Petitioner is the estate of Annie Sells, who died on February 9, 1945, in Orange, Orange County, Texas. The estate acts herein by and through its executors, G. M. Sells and T. D. Sells, who have authority to so act. The executors reside in Orange, Texas. The estate tax return was duly filed by petitioner with the collector for the first district of Texas at Austin.Annie Sells, a feme sole throughout her lifetime, wrote and signed in her own handwriting on January 6, 1944, when she was 78 years of age, a document which is as follows:To my loved ones --[EDITORS NOTE: TEXT WITHIN THESE SYMBOLS [O> <O] IS OVERSTRUCK IN THE SOURCE.]This 213 is my desire that so long as Genie Call, George Sells or myself may live the Brick Home & contents to remain intact. The last one of us left may dispose of the Home & contents as they please, unless previously sold or disposed by common consent. To Daisy & Traylor D. Sells the Havaland China [O> Set <O]. The other pieces of china & cut glass to be divided among those who love me -- in my heirs.To Charlotte Traylor Bell, my diamond ring. To Olive Sells Wren my Cameio [sic] Pin. To Mildred Sells Haines my pearl necklace & pin. My diamond Pin to Daisy Gee Sells, other little trinkets & personal effects to be divided or given away. (none to be sold)I would like to set aside as an educational loan fund my Bank Stock in The Orange Nat. Bank, the dividend to be used to provide scholarship first to relatives or other Boys or girls. I wish that $ 200.00 hundred dollars per year be given for Missions, or where most needed in The First Methodist Church in Orange Tex. The Pastor & Stewards as trustees.My share in the Brown Paper Mill & other personal property I desire to give equally to my brothers & sisters or the interest thereof to perpetuate, a regular income to my brothers214 & sisters & to the present & [O> in <O] coming generations of nieces and Nephews leaving this in trust to G. M. Sells & Traylor D. Sells, Sr.Signed by Annie Sells, Jan. 6, 1944.To Traylor D. Sells 10 ft. of ground for his drive way.694 The sole surviving heirs at law of decedent are her 2 brothers, G. M. Sells and W. R. Sells, and 2 sisters, Eugenia Call, wife of George Call, and Katherine Traylor, wife of W. D. Traylor. She was also survived by several nephews and nieces, including Traylor D. Sells, his brother and 2 sisters, none of whom was of scholastic age, as well as 11 grandnephews and grandnieces of scholastic age, as follows: William Traylor Bell, who has 2 1/2 more years in college; Patricia Lynn Traylor, who is in her first year in college; Frank S. Haines, Jr., who finishes college this year; George Monroe Sells II, who has 3 more years, now being a freshman; Traylor Dixon Sells, Jr., a freshman, who also has 3 more years; as well as the following 6 who are not as yet ready for college: Betsy Ann Bell, age 14; Charlotte Traylor Bell, Jr., age 2; Carolyn Traylor, age 14; Dixon Lee Traylor, Jr., age 11; William Burt Traylor, age 16, and John Potts Traylor, age 215 6. George Monroe Sells II and Traylor Dixon Sells, Jr., are children of Traylor D. Sells, one of the joint executors, as well as the trust officer of the Orange National Bank, hereinafter sometimes referred to as the bank. All of the grandnephews and grandnieces of college age are now attending Southwestern University.The above mentioned document signed by Annie Sells on January 6, 1944, was filed with the County Court of Orange County, Texas, acting as a probate court of competent jurisdiction. On June 11, 1945, the document was duly admitted to probate as the last will and testament of Annie Sells; and G. M. Sells and Traylor D. Sells (son of W. R. Sells) were appointed joint executors of her estate. Thereafter, said appointees duly qualified as such executors by taking the required oath and by giving bond as required by the order of the court.On June 29, 1945, the executors filed in the probate court an inventory and appraisement of the estate which disclosed the following assets subject to liabilities:Real estate:Old Sells home$ 5,500.00Stocks:1,687 1/2 shares of stock in Brown Paper Mill Co37,631.25150 shares of stock in the Orange National Bank22,125.004 shares of stock in the Orange Casket Co180.00Miscellaneous:Cash in bank11,224.67Jewelry, etc89.00Total assets76,749.92Less liabilities:Miscellaneous675.75Net estate76,074.17216 On July 17, 1945, the court entered an order approving the inventory and appraisement of the estate as set forth above.695 Within the time provided by law, the executors of the estate filed an estate tax return wherein they reported as a part of the gross estate the old Sells home at a value of $ 5,500, the shares of stock in the Brown Paper Mill Co. at a value of $ 37,631.25, and the 150 shares of stock in the Orange National Bank at a value of $ 22,125. The executors claimed, as a deduction under "Charitable, Public and Similar Gifts and Bequests," schedule N of the return, the amount of $ 22,125 representing the value of the 150 shares of stock in the Orange National Bank. The return as thus filed showed no tax liability.The respondent determined that at the time of the decedent's death, the value of the old Sells home was $ 17,500, that the value of the Brown Paper Mill Co. stock was $ 54,000, and that petitioner was not entitled to a deduction under section 812 (d) of the Internal Revenue Code of the claimed amount of $ 22,125 or any other amount. For the purpose of this proceeding, the parties now agree that the value of the old Sells home was $ 12,500 instead of 217 $ 5,500 reported by the executors and instead of $ 17,500 determined by the respondent. The increase in the valuation of the Brown Paper Mill Co. stock is not contested.On December 17, 1945, the probate court entered an order which, so far as it is here material, is as follows:This the 17th day of December, 1945, it being brought to the attention of the Court that Annie Sells, deceased, was the owner of 150 shares of stock in the Orange National Bank in Orange, Texas, and also that she was the owner of certain real estate designated as the Home Place and more particularly described as follows, to-wit:* * * And it further appearing to the Court that according to the terms of the will of the said Annie Sells, deceased, heretofore admitted to Probate in this Court, that the said Orange National Bank Stock was left in trust with the Orange National Bank as Trustee. * * And it also being shown to the Court that there is ample cash on hand to pay all of the debts of the deceased, and to pay the expenses of this administration and that therefore the stock and dividends hereinabove mentioned, and the real estate above described should -- distributed to those entitled to the same. 218 It is therefore ordered by the Court that the administrators herein transfer and deliver the 150 shares of Orange National Bank Stock owned by the said Annie Sells, to the Orange National Bank as trustee.In accordance with the above order of December 17, 1945, the executors of the estate of Annie Sells turned over to the bank the 150 shares of stock of the bank. On or prior to January 2, 1946, an account was opened at the bank in the name of "Orange National Bank, Trustee, Miss Annie Sells Estate." The trustee's receipts and disbursements with reference to this account from the beginning to August 15, 1947, inclusive, are as follows: 696 DateItemReceiptsDisbursements1946Jan. 3Deposit dividend #136$ 1,500.00Jan. 3First Methodist Church$ 200.00Dec. 3Deposit dividend #1371,800.001947Jan. 4First Methodist Church200.00July 21Orange Nat. Bank, trust fees112.50Aug. 15William Traylor Bell500.00Aug. 15Frank S. Haines, Jr500.00Aug. 15Patricia Lynn Traylor500.00Aug. 15George Monroe Sells, II500.00Aug. 15Traylor Dixon Sells, Jr500.00The balance in the above account after the above disbursements on August 15, 219 1947, was $ 287.50.On May 8, 1947, the probate court entered the following order:On this the 8th day of May, 1947, came on to be heard, in the above styled and numbered cause, the oral application of G. M. Sells and Traylor Sells in their capacity as joint executors of the will and estate of Annie Sells, deceased, for clarification of a certain Order of this Court entered herein December 17, 1945, on the point of whether or not this Court did thereby appoint The Orange National Bank as Trustee of the Trust for religious and educational purposes created by the will of said decedent.Thereupon it appeared to the Court: that an Order was entered herein on December 17, 1945, whereby this Court adjudicated (among other things) that said decedent's one hundred fifty (150) shares of stock in The Orange National Bank were left in trust with The Orange National Bank as Trustee, and whereby this Court ordered said executors to transfer and deliver said stock to The Orange National Bank as such Trustee; and that said Order, as entered, does not fully and accurately set forth what this Court decided, and requires clarification.It further appeared to the Court that the provisions of said decedent's220 will clearly indicate her intention to create a trust for specified religious and educational purposes, and to set aside her stock in The Orange National Bank as the fund or property to be utilized for the purposes of said trust, but do not clearly designate a trustee who shall administer said trust.The Court being of the opinion, then and now, that the said trust should not be permitted to fail for want of a trustee, and that this Court should appoint a trustee to administer said trust:It Is, Therefore, Ordered, Adjudged and Decreed by the Court: that said The Orange National Bank be, and it is hereby, appointed Trustee of said trust and vested with full power and responsibility to act as such Trustee in accordance with the provisions of said will and the laws of Texas; and that the said previous Order of December 17, 1945, insofar as applicable, be, and the same is hereby, confirmed and carried forward; and that the action of said executors in heretofore complying with said previous Order by transferring and delivering said one hundred fifty (150) shares of stock to said The Orange National Bank as Trustee, be, and the same is hereby, approved and confirmed.On or about May 19, 221 1947, the bank accepted the appointment as trustee of the above mentioned 150 shares of bank stock.On July 23, 1947, the bank addressed a letter to each of the nephews and nieces of decedent who had children of scholastic age and who 697 were about to attend college or had been attending college. The body of these letters was the same except for the names of the children mentioned therein. The one addressed to "Mr. and Mrs. John Y. Bell" was as follows:As you probably already know, your aunt, Miss Annie Sells, left an educational trust with the Orange National Bank. The income from this trust is to be used for educational and religious purposes. It is our understanding that your son William Traylor Bell plans to re-enter college this fall and, if so, he would be entitled to his prorata part of this trust.We will appreciate hearing from you by letter stating positively that Billy is going to college and that the money received from this trust by him will be used for his education only.Disbursement will probably be made by us early in August, but not until our file is complete with the proper request. We sincerely hope that we will hear from you in the near future so 222 that we can clear this matter in plenty of time before school starts.After all the nephews and nieces who had children of scholastic age had replied to the letter of July 23, 1947, the bank, on August 15, 1947, made the five distributions of $ 500 each to the grandnephews and grandnieces mentioned in the above schedule of receipts and disbursements of the trustee.With respect to the educational feature of the trust here in question, the policy of the trustee is to use only the income of the trust remaining after the payment of expenses and the annual payment of $ 200 to the First Methodist Church to give the educational benefit to the now living grandnephews and grandnieces of the decedent (11 in number) and that after that time the beneficiaries will be selected with the assistance and advice of whoever is the pastor of the First Methodist Church in Orange, Texas. The trust was a trust in perpetuity.There has been no contest of the decedent's will affecting the trust for religious and educational purposes. There is complete accord between the heirs of the decedent and the trustee as to the interpretation of the will. Evidence of that accord is in the form of an affidavit executed223 by each of the heirs and filed with the trustee. These affidavits are kept by the trustee as a part of its administration of the trust and are in the main identical. The status of the "relatives" of the decedent as prospective recipients of the educational benefits of the trust is set forth in full in the affidavits, and a summary of the common interpretation by the heirs, the executors, and the trustee is found in the following portion of each affidavit:(3) All agree that, subject to the above-mentioned annual payments to the First Methodist Church, the dividends or other income from said stock are to be disbursed from time to time by the trustee of said trust exclusively to provide scholarships or other educational advantages for boys and girls selected by such trustee with the advice and assistance of the person who may then be the pastor of said Church. All agree that the will, in providing for the distribution of such educational benefits, indicates at least a slight preference of relatives of 698 the testatrix, but not a limitation to that class. In other words, all agree that the testatrix in her will expressed a desire that boys and girls related to her have some224 preference in the selection of those who are to be extended the opportunity to benefit from the distribution of scholarships or other educational advantages from the funds she provided, but that she did not confine her charity to such relatives. All agree, therefore, that in the distribution of such educational benefits, the only relatives who are entitled to any character of preference are those of her nephews and nieces who are now in existence: namely, the following:[Here follows a list of the 11 grandnephews and grandnieces heretofore mentioned in these findings. The affiants, in using the terms "nephews and nieces," unquestionably meant grandnephews and grandnieces, since these were the ones that were specifically named in paragraph 3 of the affidavits.]No part of the activities of the trustee of the trust here in question consisted of carrying on propaganda or otherwise attempting to influence legislation.OPINION.The one issue remaining in this proceeding is whether petitioner is entitled to deduct from the value of the gross estate under section 812 (d) of the Internal Revenue Code the amount of $ 22,125 as representing a bequest to a trustee to be used by such trustee225 exclusively for religious or educational purposes. The material provisions of this section, as amended, are in the margin. 1Since the parties 226 agree that no part of the activities of the trustee was carrying on propaganda or otherwise attempting to influence legislation and petitioner is not claiming a deduction in excess of the value of the 150 shares of bank stock required to be included in the gross estate, it follows that petitioner is entitled to the deduction it claims if the remaining facts relative to the claimed deduction fall within the following provisions of the statute:The amount of all bequests * * to a trustee * * * but only if such contributions or gifts are to be used by such trustee * * * exclusively for religious * * * or educational purposes * * .The respondent contends that the decedent's will was too vague to warrant a holding that it was the decedent's intention that her 150 shares of bank stock be set aside in a trust for the purpose of using the income exclusively for religious and educational purposes, and, if wrong in that contention, then the educational feature of the trust must 699 be regarded as bestowing a private as contrasted with a public benefit, thus rendering the bequest nondeductible for that reason.That part of the will under which petitioner contends a deductible bequest227 was made is as follows:I would like to set aside as an educational loan fund my Bank Stock in The Orange Nat. Bank, the dividend to be used to provide scholarship first to relatives or other Boys or girls. I wish that $ 200.00 hundred dollars per year be given for Missions, or where most needed to The First Methodist Church in OrangeTex. The Pastor & Stewards as trustees.It is a cardinal principle in the interpretation of wills that they be construed to effectuate the intention of the testator and that if a general charitable purpose is manifest, within the limits of the testator's language, a broad and liberal construction should be applied to that language and the gift upheld. John Markle et al., Executors, 28 B. T. A. 201. See also Beggs v. United States, 27 Fed. Supp. 599.The probate court recited in its order dated May 8, 1947, that the above provisions of the decedent's will "clearly indicate her intention to create a trust for specified religious and educational purposes, and to set aside her stock in The Orange National Bank as the fund or property to be utilized for the purposes of said trust * ." 228 The court further recited that the said provisions of the will "do not clearly designate a trustee who shall administer said trust" and that, being of the opinion "that the said trust shall not be permitted to fail for want of a trustee," it thereupon ordered, adjudged, and decreed "that said The Orange National Bank be, and it is hereby, appointed Trustee of said trust and vested with full power and responsibility to act as such Trustee in accordance with the provisions of said will and the laws of Texas * * ." The heirs, executors, and trustee are all in accord with the probate court's construction of what the decedent's intention was with respect to her 150 shares of bank stock. We also agree with that construction and hold that it was the decedent's intention that her 150 shares of bank stock be set aside in a trust, the income from which was to be used exclusively for religious and educational purposes. Cf. Colton v. Colton, 127 U.S. 300">127 U.S. 300; Busby v. Lynn, 37 Tex. 146">37 Tex. 146.Was the bequest rendered nondeductible because of the provision in the decedent's will that part of the income was to be used to provide scholarships229 "first to relatives or other boys or girls"? It should be noted that the decedent did not limit the educational purposes of her trust to the use of her relatives. She merely indicated that a preference should be given to them and did not confine her charity to such persons. Such a mere preference for relatives will not defeat the deduction provided for under section 812 (d), supra. Commonwealth Trust Co. of Pittsburgh v. Granger, 57 Fed. Supp. 502; Restatement 700 of Trusts, sec. 375, comment c; Estate of Agnes C. Robinson, 1 T.C. 19">1 T. C. 19; Annotation, 131 A. L. R. 1277, 1289. The heading of paragraph IV of the annotation reads as follows:IV. Trust giving preference to relatives.There is virtually complete agreement among the authorities that an otherwise charitable trust, looking to the benefit of the public generally, is not rendered private merely because the donor directs that relatives or descendants shall be preferred in the selection of beneficiaries.Scott, in Law of Trusts at page 2031, states: * * In the United States as well as in England, it is held that a trust 230 for the relief of poverty or the promotion of education is charitable, although by the terms of the trust it is provided that in selecting the beneficiaries preference should be given to relatives or descendants of the settlor or of other designated persons.The respondent, in contending that the bequest here involved does not qualify for a deduction under the applicable statute, relies principally upon Amy Hutchison Crellin, 46 B. T. A. 1152. In that case the taxpayer set up a fund of $ 35,157.50 in trust primarily to educate 14 of her grandnephews and grandnieces named in the trust instrument, with the provision "That the maximum amount which any one of the before-named persons is entitled to receive under the terms of this trust agreement shall be Four Thousand Dollars ($ 4,000)." The agreement then provided that any part of the fund not required for the 14 named relatives "shall be used for educational aid to young members of the First Methodist Church of Pasadena, Pasadena, California." The taxpayer claimed the $ 35,187.50 as a deduction for gift tax purposes under section 1004 of the code as representing gifts made to a "trust * * organized and231 operated exclusively for religious, charitable, scientific, literary, or educational purposes * ." In denying the deduction claimed we (then the United States Board of Tax Appeals) said: * * The fourteen relatives named in subdivision A are not within a general class of beneficiaries, and do not present an instance within the doctrine that a trust for a general class is none the less a charitable trust if it provides for a preference to certain members of the class. Cf. Schoellkopf v. United States, 124 Fed. (2d) 982.Instead of being favored beneficiaries of a more general class, the nominees in group A are the particular persons for whom the trust was primarily created. In the instrument itself they are the first named, and, if their educational demands are sufficient, they may exhaust the fund. * * * [Emphasis supplied.]The facts in the Crellin case are materially different from the facts in the instant case. In the Crellin case the trustee could use the corpus as well as the income to educate the 14 persons specifically named in the trust instrument, and could thus very easily at $ 4,000 per person exhaust the fund and leave232 nothing for the young people of the church. In the instant proceeding the trust was a trust in perpetuity and only 701 the income of the trust could be used for the purposes specified in the will. It is apparent as time goes on that an increasing number of the general class will thus receive the educational benefits specified in the decedent's will. We hold that this difference brings the instant proceeding within the previously mentioned doctrine that a mere preference for relatives will not defeat the deduction provided for under section 812 (d) of the Internal Revenue Code and that the respondent erred in disallowing the deduction claimed in the amount of $ 22,125. Estate of Agnes C. Robinson, supra;Commonwealth Trust Co. of Pittsburgh v. Granger, supra.Decision will be entered under Rule 50. Footnotes1. SEC. 812. NET ESTATE.For the purpose of the tax the value of the net estate shall be determined, in the case of a citizen or resident of the United States by deducting from the value of the gross estate --* * * (d) Transfers for Public, Charitable, and Religious Uses. -- The amount of all bequests, legacies, devises, or transfers * * to a trustee or trustees * * * but only if such contributions or gifts are to be used by such trustee or trustees * * * exclusively for religious, charitable, scientific, literary, or educational purposes * * * and no substantial part of the activities of such trustee or trustees * * * is carrying on propaganda, or otherwise attempting, to influence legislation. * * * The amount of the deduction under this subsection for any transfer shall not exceed the value of the transferred property required to be included in the gross estate.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620935/	WILLIAM E. MARCH and CARLA MARCH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentMarch v. CommissionerDocket No. 10047-77United States Tax CourtT.C. Memo 1981-339; 1981 Tax Ct. Memo LEXIS 411; 42 T.C.M. (CCH) 283; T.C.M. (RIA) 81339; June 29, 1981William E. March, pro se. David M. Kirsch, for the respondent. HALL MEMORANDUM FINDINGS OF FACT AND OPINION HALL, Judge: Respondent determined a $ 333.87 deficiency in petitioners' 1975 income tax. The issue for determination is whether petitioners are liable for the self-employment tax under section 1401. 1FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. William E. (petitioner) and Carla M. 2 March resided in Miami, Florida, at the time they filed their petition. In 1975 petitioner served as a police officer for the City of Miami Police Department (the "Department"). As a member of the Department, petitioner contributed to, and participated in, the Miami413 City Employees Retirement System. Miami police officers are exempt from social security tax under section 3121(b)(7). The Department permits its officers to accept off-duty employment. 3 Such employment may entail police-type activities or unrelated activities. The Department maintains control over all off-duty employment. Before accepting an off-duty job, an officer is required to obtain approval. Such approval depends on the absence of any conflict of interest with the City of Miami, the compatibility of the off-duty hours with the officer's regular assignments, and the type of work involved. The Department routinely disapproves all requests to work for private security agencies. On occasion private citizens or businesses (other than security agencies) will contact the Department seeking the services of a policeman. The requested services may be either short-term or continuous. It the Department is satisfied that the private party will be using the requested officer in a414 police-type capacity, i.e., directing traffic, apprehending shoplifters or providing general security, 4 then the Department will circulate the job description among a list of officers who have expressed an interest in off-duty employment. The Department maintains a roster of officers who wish to obtain off-duty jobs. 5If an officer expresses an interest in a particular job description being circulated, the Department will advise him who to contact. The creation and continuation of an employment relationship depends on the officer and the private party requesting his services. 6 Either side may415 voluntarily terminate that relationship. The specific dates and hours of such employment are established by the private party. 7 Payment for the off-duty services are made directly by the private party to the performing officer. 8The general nature of an off-duty officer's responsibilities are dictated by the private employer. However, much of the job's detail is left to the officer's discretion due to his training as a law enforcement officer. The Department does not involve itself with the operational aspects of off-duty jobs unless it is approached by an employer to solve a particular problem. Under those circumstances, the Department will give the off-duty officer certain guidelines to follow. The Department establishes a standard pay scale416 for off-duty employment involving police-type functions and generally requires officers performing off-duty services to wear their uniforms and badges. All police officers must abide by the Department's rules and regulations during working and off-duty hours. An officer may be reprimanded for an infraction of those rules. For example, an officer who abandons an off-duty job without advising the Department could be reprimanded. In 1975 petitioner provided security services to a Burger King restaurant and to a Florida State Unemployment Office during his off-duty hours. 9 At both jobs petitioner wore his police uniform and badge. The Florida State Unemployment Office hired several off-duty officers including petitioner for security reasons. The manager of the Unemployment Office established the work hours for these officers and instructed them where to stand and what areas to watch. At the same time, the Department directed these officers to stay within the confines of the Unemployment Office and not to venture outside onto the417 street. It was the Unemployment Office's policy to contact the Department whenever it had any problems concerning off-duty officers. 10In 1975 petitioner earned $ 4,226.25 from his off-duty jobs and included the amount on his 1975 income tax return. This amount was not included on the 1975 W-2 Form received from the City of Miami Police Department. Neither Burger King nor the Florida State Unemployment Office withheld any employment taxes with respect to this amount. In his statutory notice, respondent determined that petitioner owed self-employment taxes on the $ 4,226.25 earned from his off-duty employment. OPINION In 1975 petitioner, William March, was employed as a member of the City of Miami Police Department. During his off-duty hours petitioner provided security services to a Burger King restaurant and to a Florida State Unemployment Office. The issue for decision is whether the $ 4,226.25 earned by petitioner from his off-duty jobs is subject to self-employment tax under section 1401. A self-employment tax is imposed on an individual418 earning income from a trade or business, but not where the services he renders are performed as an employee. Sec. 1402. 11 In this case petitioner contends that he was an employee of the City of Miami Police Department (the "Department") while working his off-duty jobs. Furthermore, he argues that his off-duty earnings should be treated the same as his on-duty earnings for purposes of employment taxes, i.e., exempt from tax under section 3121(b)(7). 12 Respondent, of course, claims that petitioner was not an employee of the Department when performing his off-duty services, and we agree. 13419 Section 3121(d) supplies several definitions of an employee. These definitions apply for purposes of the self-employment tax provisions. Sec. 1402(d). The pertinent definition for our purpose is found in section 3121(d)(2) which provides that an employee is "any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee." This definition is elaborated upon in section 31.3121(d)-1(c), Employment Tax Regs., which provides: (c) Common law employees. (1) Every individual is an employee if under the usual common law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee. (2) Generally such relationship exists when the person for whom services are performed has the right to control and direct the individual who420 performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor. * * * (3) Whether the relationship of employer and employee exists under the usual common421 law rules will in doubtful cases be determined upon an examination of the particular facts of each case. The determination of petitioner's status is a factual inquiry, see, e.g., Air Terminal Cab, Inc. v. United States, 478 F. 2d 575, 578 (8th Cir. 1973), cert. denied 414 U.S. 909">414 U.S. 909 (1973), upon which he bears the burden of proof. Rule 142(a), Tax Court Rules of Practice and Procedure. Although the issue is not free from doubt, we believe the preponderance of the evidence presented warrants the conclusion that, with respect to his off-duty employment, petitioner was not an employee of the Department. 14 A number of considerations lead us to this conclusion. First, the right to control an individual's422 activities, not only as to results, but also as to details and means of performance, is fundamental to an employer-employee relationship. Air Terminal Cab, Inc. v. United States, 478 F. 2d 575, 579 (8th Cir. 1973); Radio City Music Hall Corp. v. United States, 135 F. 2d 715, 717-718 (2d Cir. 1943). We do not believe the Department possessed the requisite control over petitioner's off-duty employment activities. A close examination of the Department's role with respect to off-duty employment reveals the absence of this type of control. The nature of the work performed by the off-duty officer and its mode of execution were dictated by the needs of the hiring party and the officer's own discretion. 15 Furthermore, the dates and hours of off-duty employment were regulated by he hiring party and not by the Department. See Air Terminal Cab, Inc. v. United States, supra at 580. The Department did not become involved with the operational details of off-duty employment unless its advice was solicited by the hiring party. We see no reason why the Department would only provide guidance upon request if, in fact, it already possessed423 the right to control the activities of the off-duty officers. 16424 Second, implicit in an employer-employee relationship is the performance of services by the employee for the employer. See Party Cab Co. v. United States, supra at 93; sec. 31.3121(d)-1(c)(1), Employment Tax Regs. ("Every individual is an employee if under the usual common law rules the relationship between him and the person for whom he performs services is the legal relationship of employer and employee." (Emphasis added)). An employee's services directly benefit the employer or his business. See Air Terminal Cab Co. v. United States, supra at 581. In the present situation, petitioner's off-duty services were performed for, and were directly beneficial to, Burger King and the State Unemployment Office. Although petitioner's off-duty services indirectly benefited the Department in keeping the peace and protecting property, this benefit is analogous to that derived from private security agencies. Yet no one would claim that employees of those private agencies are also police department employees. 17425 In the absence of any evidence that petitioner's off-duty services discharged the Department's obligation to supply private protection (compare Rev. Rul. 74-162, 1 C.B. 297">1974-1 C.B. 297 (arrangement between private bank and police department)) or otherwise fulfilled its public safety function, we do not believe petitioner performed services for the Department in his off hours. We find support in this position by the disparate treatment accorded off-duty employment involving public safety, such as the presence of police officers at the Orange Bowl Parade. For these public safety events, off-duty officers are drafted to work and are compensated by the City of Miami.In contrast, off-duty jobs like those held by petitioner represent a voluntary association426 between the individual officer and the private employer. Third, the right of selection and the power to discharge at will are indicia of an employee-employer relationship. See Saiki v. United States, 306 F. 2d 642, 649 (8th Cir. 1962); May Freight Service, Inc. v. United States, 462 F. Supp. 503">462 F. Supp. 503, 508 (E.D. N.Y. 1978); Morish v. United States, 214 Ct. Cl. 166">214 Ct. Cl. 166, 555 F.2d 794">555 F.2d 794, 799 (1977); sec. 31.3121(d)-1(c)(2), Employment Tax Regs.Whether petitioner obtained off-duty employment or retained such employment was determined by the private party seeking his services. The Department served merely as an intermediary or referral service through which officers were notified of the existence of off-duty jobs. Cf. Saiki v. United States, supra at 652 (booking agents); Rev. Rul. 56-154, 1 C.B. 447">1956-1 C.B. 447 (police department recommending officers for off-duty employment). Fourth, the mode427 and source of payment may indicate whether an employer-employee relationship exists. See Saiki v. United States, 306 F. 2d 642, 652 (8th Cir. 1962); Party Cab Co. v. United States, 172 F. 2d 87, 93 (7th Cir. 1949). Where, as in this case, petitioner performs off-duty services for a private employer and is paid by that employer, it would seem to be anomalous to categorize a third party, the Department, as petitioner's employer with respect to those services. Id. Consistent with this view is the exclusion of petitioner's off-duty earnings from the W-2 Form issued by the Department. In close cases, of which this is one, there are bound to be factors pointing in the opposite direction. The general requirement that officers wear their uniforms and badges while on off-duty employment and the establishment of standard pay rates by the Department for off-duty jobs are two of these factors. See also, notes 16 and 17, supra. 18 The aggregate of these factors, however, do not tip the scale in petitioner's favor. 19428 To reflect the foregoing, Decision will be entered for the respondent. Footnotes1. All section references are to the Internal Revenue Code of 1954 as in effect during the year in issue.↩2. Carla March is a party solely by virtue of having filed a joint return with her husband.↩3. The term "employment" and "employer" are used in the findings of fact for convenience. Their use is not meant to imply the existence or non-existence of an employer-employee relationship.↩4. Certain jobs such as "bouncers" are not considered to be appropriate for off-duty employment. ↩5. The Department is under no obligation to supply policemen to these private parties. Moreover, an officer is under no obligation to accept these jobs. Off-duty employment is purely voluntary and has no effect on an officer's regular assignments. An exception, however, is made for "big events" involving public safety, e.g↩., the Orange Bowl Parade. Officers are drafted to work these events and are compensated directly by the City of Miami for these off-duty services.6. The Department, however, may recommend that an officer terminate his off-duty employment if he violates department rules and re gulations during those off-duty activities. ↩7. Of course, the times and dates must be compatible with the officer's regular assignments. ↩8. The City of Miami refuses to be held responsible for these payments because the off-duty employment is above and beyond an officer's normal tour of duty.↩9. For purposes of this opinion the parties have stipulated that petitioner was not an employee of either Burger King or the State of Florida.↩10. For example, the Unemployment Office would notify the Department if an off-duty officer failed to appeal for work.↩11. SEC. 1402. DEFINITIONS. (a) NET EARNINGS FROM SELF-EMPLOYMENT.--The term "net earnings from self-employment" means the gross income derived by an individual from any trade or business carried on by such individual, less the deductions * * * (b) SELF-EMPLOYMENT INCOME.--The term "self-employment income" means the net earnings from self-employment derived by an individual * * * during any taxable year * * * (c) TRADE OR BUSINESS.--The term "trade or business", when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 * * , except that such term shall n ot include-- (3) the performance of service by an individual as an employee * * ↩12. Section 3121(b)(7)↩ generally excludes from social security taxes those wages received with respect to services "performed in the employ of a state, or any political subdivision thereof * * *." Respondent does not dispute that petitioner's on-duty earnings are exempt from social security taxes. 13. The parties stipulated that petitioner was not an employee of either the Burger King restaurant or the Florida State Unemployment Office. See note 9, supra. The issue, as framed by the parties, is whether petitioner was an employee of the City of Miami Police Department while working his off-duty jobs. If not, then he will be deemed to be self-employed for purposes of section 1402↩.14. We offer no comment as to the actual status of petitioner's off-duty activities. We note in passing, however, that our holding does not necessarily imply that petitioner was an independent contractor. See Party Cab Co. v. United States, 172 F. 2d 87, 90 (7th Cir. 1949), revg. 75 F. Supp. 307">75 F. Supp. 307↩ (N.D. Ill. 1947).15. For example, the Florida State Unemployment Office instructed officers, like petitioner, where to stand and what areas to watch. Any further details were left to the officer's discretion due to his expertise. Although the Department directed petitioner not to go outside the office, this instruction was not directly related to his performance which took place inside the Unemployment Office. ↩16. Petitioner correctly points out that the Department did wield and exercise a large degree of control over off-duty employment in that all such employment had to meet its approval. However, it is important to keep in mind that two types of jobs (on-duty jobs and off-duty jobs) exist simultaneously in this case. There is no dispute that an employer-employee relationship existed between petitioner and the Department with respect to his regular, on-duty job. In our opinion, the control vested in the Department with respect to off-duty employment relates solely to this on-duty, employer-employee relationship. It does not represent the Department's attempt to control the details of the off-duty employment. For example, Department approval of off-duty employment is directly attributable to the Department's desire to ensure the absence of any interference with an officer's on-duty activities and to preserve the department's image. This type of broad control is qualitatively different from the type of direct, operational control implicit in the employer-employee relationship. See Party Cab Co. v. United States, 172 F. 2d 87, 92-93 (7th Cir. 1949) Similarly, we recognize that petitioner's off-duty activities may have been constrained by Department rules and regulations. The general application of those rules, however, relates to petitioner's status s a member of the Department and is not specifically aimed at controlling the details of petitioner's activities while working at Burger King or the State Unemployment Office. For example, the mere fact that petitioner might be reprimanded by the Department if he abandons his off-duty job without notice does not necessarily mean the Department controls his off-duty employment activities. Rather, any conduct unbecoming a police officer, such as abandoning a job, would presumably violate the Department's rules and regulations whether such conduct related to off-duty employment or not. Petitioner also emphasizes the fact that the State Unemployment Office contacted the Department whenever it had problems with off-duty officers. According to petitioner, this demonstrates the Department's right to control the officers. There is no evidence in the record, however, that the Unemployment Office was obligated to funnel its problems through the Department. Whether it did so out of courtesy to the Department or for any other reason is unclear. However, the testimony of the police officer in charge of the Department's off-duty employment section indicates that private employers were not restricted in their handling of employment problems and that off-duty officers served at the discretion of those who hired them.↩17. The mere fact that off-duty officers are empowered to perform those law enforcement functions that they normally perform during on-duty hours (see Fla. Stat. Ann. § 790.052↩ (West)) does not alter our position. The possibility that circumstances may warrant an off-duty officer to assume his on-duty responsibilities is incidental to his off-duty activities and does not automatically make him a 24-hour per day employee.18. We hesitate to read too much into these countervailing factors in the absence of evidence as to their underlying rationales. For example, requiring off-duty officers to wear uniforms may merely represent the Department's endorsement of petitioner's activities as opposed to the employment of his services. ↩19. In support of his position, petitioner also cites us to State v. Robinson, 379 So. 2d 712">379 So. 2d 712 (Dist. Ct. App. 1980), State v. Williams, 297 So. 2d 52 (Dist. Ct. App. 1974), and City of Miami v. Brownlow, Industrial Relations Commission No. 2-2904. All of these cases involve the status of police officers engaged in the performance of off-duty employment. State v. Robinson and State v. Williams, supra, deal with an off-duty officer's confrontation with criminal activity and City of Miami v. Brownlow↩, deals with an off-duty officer's claim for workmen's compensation. None of the cases, however, involve the applicability of employment taxes to off-duty jobs and, therefore, are distinguishable.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620938/	ESTATE OF GEORGE C. DE VOS, GEORGE B. CATLIN, ADMINISTRATOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of De Vos v. CommissionerDocket No. 4517-73.United States Tax CourtT.C. Memo 1975-216; 1975 Tax Ct. Memo LEXIS 162; 34 T.C.M. (CCH) 933; T.C.M. (RIA) 750216; June 30, 1975, Filed James L. Howlett, for the petitioner. Daniel J. Westerbeck, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in the estate tax of the Estate of George C. DeVos in the amount of $3,805 and an addition to tax under section 6651(a), I.R.C. 1954, 1 for failure to timely file the estate tax return in the amount of $5,142. Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for our decision164 the following: (1) Whether the $80,000 proceeds of a life insurance policy on decedent's life of which Margaret DeVos, decedent's former wife, was beneficiary are includable in decedent's gross estate and, if so, whether the estate is entitled to a deduction under section 2053(a) either for the amount paid under that policy or for the amounts paid to other beneficiaries under two policies which, under a divorce decree, decedent was required to assign to Margaret DeVos, one for a period of 5 years only. (2) Whether the failure of the administrator of decedent's estate to timely file the estate tax return was due to reasonable cause and not to willful neglect within the meaning of section 6651(a). FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. George B. Catlin, the duly qualified administrator of the Estate of George C. DeVos, is a resident of Grosse Pointe Woods, Michigan and had his office in Detroit, Michigan at the time the petition in this case was filed. Mr. Catlin filed the Federal estate tax return for the estate of George C. DeVos with the internal revenue service at Detroit, Michigan, on March 24, 1970. George C. DeVos(hereinafter165 decedent) died on January 3, 1968. Mr. Catlin was appointed as administrator of decedent's estate on February 27, 1968, and was issued letters of administration by the Probate Court of the County of Oakland, State of Michigan, on March 11, 1968. Prior to March 28, 1966, decedent was married to Margaret DeVos (hereinafter Margaret). Margaret filed a suit for divorce from decedent in the Oakland County Circuit Court and on March 28, 1966, was granted a judgment of divorce. The divorce decree provided in part as follows: ALIMONYThat the Defendant, George DeVos, shall pay the sum of $75.00 a week to the Plaintiff, Margaret DeVos, as alimony, for a period of five years, said five year period to be computed from January 17, 1966 and not from the date of this Judgment, and such alimony to continue whether the Plaintiff, Margaret DeVos marries or not; however, such alimony to be suspended in the event of the death of either the Plaintiff, Margaret DeVos, or the Defendant, George DeVos. PROVISION IN LIEU OF DOWERIT IS FURTHER ORDERED, ADJUDGED and DECREED, that George DeVos, Defendant herein shall pay to Margaret DeVos, Plaintiff, the sum of One and no/100 ($1.00) Dollar, 166 and that this provision herein shall be in lieu of her dower in the lands of her husband, and that he shall hereafter hold his remaining lands free, clear and discharged from any such dower right or claim and said provision shall also be in full satisfaction of all claims that she may have in any property which he owns or may hereafter own, or in which he has or may hereafter have any interest. INSURANCE PROVISIONIT IS FURTHER ORDERED, ADJUDGED and DECREED that the Defendant, George DeVos, shall forthwith assign to the Plaintiff, Margaret Devos, a certain $6,000.00 life insurance policy issued by the Prudential Life Insurance Company, and insuring the life of Defendant, George DeVos; and in addition, the Defendant, George DeVos shall assign to the Plaintiff, Margaret DeVos, a certain $10,000.00 life insurance policy insuring Defendant, and issued by the John Hancock Life Insurance Company, said assignment to be effective for a period of five years only from the date of this Judgment, after which time it is to be reassigned to Defendant, George DeVos by Plaintiff, Margaret DeVos. The Plaintiff shall hereafter have no further interest as beneficiary or otherwise in and to any167 other life insurance policies, endowment, or annuity contract standing in the name of or insuring the life of the Defendant. The decedent never actually assigned the two policies specified in the divorce decree to Margaret. After the divorce decree was entered, Margaret and her attorney both contacted decedent with respect to the assignment of the two insurance policies to Margaret. The day following a visit to decedent by Margaret's attorney, decedent called Margaret and asked her to meet him in order that he might deliver to her an insurance policy. Instead of decedent meeting Margaret, Ralph Whipple, Jr., an employee of Royal Oak Heat Treat, Inc., of which decedent was president, met Margaret and handed her an envelope. The envelope had been handed to Mr. Whipple by decedent with the request that Mr. Whipple meet Margaret and give her the envelope. Margaret opened the envelope and noticed that it contained one insurance policy on decedent's life and that the beneficiary was designated as "Margaret Ann DeVos--Ex-Wife." Since the policy was not either of the policies mentioned in the divorce decree, Margaret contacted decedent and was told that the policy which had been delivered168 to her was a substitute for the other two policies. She asked decedent to talk to her attorney and understood that decedent was to talk to her attorney. She did nothing further. The policy which was delivered to Margaret was a group life insurance policy issued by Travelers Life Insurance Company and owned by decedent's employer, Royal Heat Treat, Inc. (hereinafter referred to as ROHT), under the terms of which decedent held the right to designate the beneficiary. The policy was in the amount of $40,000 and carried an additional $40,000 benefit for accidental death. Upon decedent's death, the Travelers Life Insurance Company paid to Margaret $40,000 in the latter part of January and an additional $40,000 in the latter part of February in discharge of the policy in which she was named beneficiary. The two checks were delivered to Margaret by Mr. Whipple. The Prudential Insurance Company policy referred to in the divorce decree was paid to Joan B. Logan DeVos, the beneficiary designated therein, who was decedent's wife at the date of his death. The payment was in the amount of $12,177, $6,000 being the face amount of the policy, $6,000 accidental death benefit, and the remaining $177169 accumulated and current dividends. The John Hancock Mutual Life Insurance Company policy was paid to the beneficiary designated therein, who was Marion C. Detloff, decedent's sister. The payment was in the amount of $18,632.49 which was the face amount of the policy plus accidental death benefits and accumulated and current dividends, minus a $1,888.96 loan against the policy. The $80,000 paid to Margaret by Travelers Life Insurance Company and the amounts paid to Joan De Vos and Mrs. Detloff, respectively, by the Prudential Insurance Company and the John Hancock Mutual Life Insurance Company were included in decedent's gross estate as reported on the estate tax return. Decedent's widow, Joan DeVos, on January 24, 1968, filed with the Probate Court of Oakland County, Michigan (hereinafter Probate Court) a petition for administration of decedent's estate, asking that Mr. Catlin be appointed administrator, and listing Mr. Catlin as attorney. On January 20, 1968, Mrs. DeVos had met with Mr. Catlin for 2-3/4 hours to discuss various matters concerning the probate of decedent's estate, and on January 22, 1968, Mr. Catlin had telephoned an agent of the Travelers Life Insurance Company. 170 In the petition for probate of decedent's estate the statement was made that decedent left an estate within Oakland County which included no real estate and a personal estate of "$50,000.00 upwards or thereabouts." On January 25, March 7, and April 18, 1968, Mr. Catlin contacted Mrs. DeVos but did not contact her again until July 16, 1969, when he wrote a letter to her requesting information about a land contract. Soon after Mr. Catlin's appointment as administrator of decedent's estate, Mr. Benjamin Pinkos, an employee of ROHT, and Mr. Whipple informed him that decedent owned 28,600 shares of ROHT stock at the date of his death. Mr. Catlin began to take an interest in the management of ROHT immediately after his appointment as administrator of decedent's estate, and Mr. Pinkos became the principal managing officer of ROHT. On February 28, 1967, decedent had executed an agreement with Garrett H. Mouw, Wendell G. Mouw, and Robert J. Walls, for the purchase of 90,000 shares of common stock of ROHT. Under the terms of this agreement, decedent was to pay 83-1/3 cents per share for the stock, which sum came to $25,000 to be paid to each seller. Decedent paid $5,000 to each of the three171 sellers upon execution of the agreement and was to pay the remaining $20,000 to each of the sellers at the rate of $150 a month to each seller beginning April 15, 1967 and continuing until the entire purchase price was paid. Under the agreement decedent was to secure the unpaid balance by obtaining a $60,000 life insurance policy naming the sellers as beneficiaries under the policy to the extent of the unpaid balance of the purchase price of the stock. Decedent did in fact obtain a policy with Travelers Life Insurance Company in the face amount of $100,000 against which there was an indebtedness at the date of his death of $319.50. The proceeds of this policy were paid to the three sellers to the extent of their interest therein under the stock purchase agreement and the balance to the other beneficiary named therein, Mr. Pinkos. These proceeds were paid to the beneficiaries within 2 months after decedent's death through Mr. Catlin's efforts and at that time Mr. Catlin as administrator of decedent's estate took possession of the 90,000 shares of ROHT stock which was the subject of the stock purchase agreement. On May 8, 1968, Mr. Pinkos purchased 6,000 shares of ROHT common stock172 from decedent's estate for $5,010. On May 27, 1968 and again on June 19, 1968, Mr. Catlin wrote to Margaret with respect to the opening of a safe-deposit box which was held jointly by Margaret and decedent. The box was opened by Mr. Catlin and Margaret on June 28, 1968, but Mr. Catlin did not at that time inquire of her with respect to her interest if any in decedent's estate under the divorce decree. On September 26, 1968, Mr. Mally offered to purchase 94,600 shares of ROHT stock from decedent's estate for $30,000. Mr. Catlin then consulted Mr. Warren DeCook, a certified public accountant, regarding the evaluation of Mr. Mally's offer. On November 15, 1968, Mr. Catlin rejected Mr. Mally's purchase offer since he believed the ROHT stock to be worth more than $30,000. On November 15, 1968, Mr. Catlin as administrator of decedent's estate petitioned the Probate Court for permission to employ Warren DeCook to assist in the preparation of the Federal estate tax return. The Probate Court on November 18, 1968, authorized the employment of Mr. DeCook. At that time both Mr. Catlin and Mr. DeCook were aware that a Federal estate tax return for decedent's estate would be necessary and173 that the due date of the return was April 3, 1969. In November of 1968 Mr. Catlin told Mr. DeCook that decedent was divorced from Margaret, and Mr. DeCook requested that Mr. Catlin obtain a copy of the divorce decree and submit it to him. The preliminary notice, Form 704, which was due to be filed with the Internal Revenue Service with respect to decedent's estate on March 3, 1968, was not filed. In early April of 1969, Mr. Catlin was approached with respect to the sale of all of the ROHT stock held by decedent's estate. Negotiations ensued, and on April 24, 1969, the estate sold its ROHT stock for $58,000. In late March or early April 1969, Mr. Catlin filed an undated request with the Internal Revenue Service for an extension of 90 days for the filing of the Federal estate tax return for decedent's estate. In this request Mr. Catlin informed the Internal Revenue Service that the firm of DeCook and Nuyen had been retained to prepare the Federal estate tax return and requested that approval of the extension be mailed to that firm at their address in Detroit, Michigan. The Internal Revenue Service mailed to DeCook and Nuyen at the Detroit address of that firm under date of174 April 9, 1969, a rejection of the requested extension of time for filing Federal estate tax return, giving as the reason: We have no record of your filing a preliminary notice (704) for the above estate. Form 704 has to be on file before an extension can be granted on Form 706. After receiving the rejection of the request for an extension shortly after April 9, 1969, Mr. DeCook decided that he would proceed to prepare and file an accurate return as soon as feasible. Mr. DeCook was aware at that time that there were certain items of information missing which were necessary to file an accurate return. Mr. DeCook did not advise Mr. Catlin to get some estate tax return in as soon as possible or that his failure to do this might result in a penalty but did advise him to attempt to obtain the information to file an accurate return as soon as possible. Mr. Catlin is an attorney at law practicing in the State of Michigan. He was admitted to practice in 1956 and has been engaged in the private practice of law since 1960. He is a general practitioner, specializing to some extent in municipal law. He does not prepare tax returns for clients but refers his clients to certified public accountants175 for this service. In his entire practice, he has prepared only one Federal estate tax return. Mr. Catlin was aware when he requested an extension of time for filing the estate tax return, that the return was due to be filed on April 3, 1969. When the estate tax return was filed on March 24, 1970, it was accompanied by an affidavit by Mr. Catlin as administrator of decedent's estate, requesting that no penalty be assessed for the late filing of the estate tax return. In this affidavit, Mr. Catlin stated that when he was first appointed as administrator of decedent's estate, it did not appear to him that it would be necessary to file an estate tax return but that in November 1968 from information he then had, it appeared that it would be necessary to file such a return, but at that time he was of the opinion that no tax would be owing. He further stated that since April 1969, he had made continued investigation and inquiry which had uncovered information regarding payments of life insurance proceeds to various individuals. He recited the facts which he uncovered with respect to the policies called for in the divorce decree of Margaret and decedent not having been assigned to Margaret, 176 but $80,000 of insurance having been paid to Margaret, and the two policies referred to in the divorce decree having been paid to decedent's widow, Joan DeVos, and decedent's sister. He further recited the lack of cooperation of Joan DeVos with respect to information concerning the house she and decedent had been purchasing on a land contract and her denial of having received insurance proceeds. On April 1, 1970, Mr. Catlin filed an amended Federal estate tax return for decedent's estate because of a $10,000 claim of Marion C. Detloff against the estate and on August 26, 1970, filed a refund claim for decedent's estate based on the exclusion from the estate of the $80,000 insurance paid to Margaret. Preparation of the estate tax return had been completed on March 13, 1970 and immediately after that date Mr. Catlin petitioned the Probate Court for authority to pay the tax shown as due on the return. On March 24, 1970, the Probate Court authorized the payment and on that same day Mr. Catlin personally took the return together with a check for the tax to the downtown office of the Internal Revenue Service and filed the return and paid the tax and interest shown as owing thereon. 177 Respondent in his notice of deficiency made certain adjustments to the taxable estate as reported which are no longer in issue in the case having been disposed of by the parties and stated that The issue raised in your claim for refund requesting that the proceeds of certain life insurance policies in the total amount of $80,000.00 should be not includible in the gross estate has been given careful consideration and it has been determined that the decedent owned these policies at date of death and they are properly includible in the gross estate. OPINION Section 2042(2) provides that the value of the gross estate shall include amounts receivable by beneficiaries other than the executor as insurance under policies on the life of the decedent with respect to which the decedent possessed at the date of his death any incidents of ownership, exercisable either alone or in conjunction with any other person. Section 20.2042-1(c)(2), Estate Tax Regs., provides that the term, "incidents of ownership" has reference to the right of the insured to the economic benefits of the policy and includes178 "the power to change the beneficiary." The facts here show that decedent had named his exwife, Margaret, as the beneficiary of the Travelers Life Insurance Company policy carried on his life by ROHT with the right in him to name the beneficiary but that he still retained a right to change the beneficiary at the date of his death. It is well settled that the right to change the beneficiary of an insurance policy is such an incident of ownership as to require the inclusion of the proceeds of the policy in the decedent's estate. Estate of Michael Collino,25 T.C. 1026">25 T.C. 1026, 1033 (1956); Piggott's Estate v. Commissioner,340 F. 2d 829, 834 (6th Cir. 1965), and cases there cited, affirming a Memorandum Opinion of this Court. Although petitioner does not in his brief specifically so state, he does apparently recognize this general rule, but argues that effectively, petitioner did not have the right to change the beneficiary of the policy paid to Margaret. Petitioner contends that the facts here show that decedent substituted the Travelers Life Insurance Company179 policy for the policies provided for in the divorce decree and Margaret accepted that policy in lieu of those the divorce decree required to be assigned to her. Petitioner argues that it follows, under the facts of this case, that decedent should be considered as having assigned all rights in the Travelers policy to Margaret. Neither the facts shown in this record nor the rights of the parties under a divorce decree under the law of the State of Michigan support petitioner's contention. The evidence is clear that decedent retained at the date of his death the right to change the beneficiary of the Travelers policy insofar as his employer who carried the policy for his benefit was aware. The evidence does not support the conclusion that decedent had in fact parted with this right when he named Margaret the beneficiary of the Travelers policy. The evidence shows that the policy was delivered by Mr. Whipple to Margaret and she saw it was not either of the policies which were to be assigned to her under the requirements of the divorce decree but that she was named as the beneficiary in the policy. When Margaret spoke to decedent she was told that the policy delivered to her was a substitute180 for the policies referred to in the divorce decree. Margaret then told decedent to get in touch with her lawyer and thereafter did nothing further to require decedent to assign to her the policies which he was required to assign to her under the divorce decree. In our view, this evidence does not support a finding that decedent intended to or did divest himself of the right to change the beneficiary on the Travelers policy. The fact that decedent merely named Margaret as beneficiary of the Travelers policy but did not make this action irrevocable or even irrevocable for 5 years and the lack of further discussion between Margaret and decedent concerning the policies which decedent was required by the divorce decree to assign to Margaret supports an inference that decedent intended to reserve his right to designate another beneficiary of the Travelers policy on his life owned by ROHT. Certainly no inference can properly be drawn from these facts that decedent intended to divest himself of the right to change the beneficiary of the Travelers policy. Section 25.131, Mich. Stat. Ann. (1974), 181 provides for the determination of wife's rights respecting life insurance or annuity contracts. 2 This statute which was enacted in 1939 provides that every decree of divorce shall determine all rights of the wife in and to the proceeds of any life insurance policies on the life of the husband and that unless otherwise ordered in the decree such policies or contracts shall, upon divorce, become payable to the estate of the husband or such beneficiary as he shall affirmatively designate. 182 In Starbuck v. City Bank and Trust Co.384 Mich. 295">384 Mich. 295, 181 N.W. 2d 904, 906 (1970), the Court in discussing this provision of the Code stated: Prior to the addition in 1939 of the above-quoted portion of the statute to M.C.L.A. section 552.101, the wife was entitled to the proceeds of the policy when she remained the designated primary beneficiary after a divorce.Ancient Order of Hibernians v. Mahon (1922), 221 Mich. 213">221 Mich. 213, 190 N.W. 696">190 N.W. 696, and Guarantee Fund Life Association v. Willett (1927), 241 Mich. 132">241 Mich. 132, 216 N.W. 369">216 N.W. 369. The effect of the amendment, as stated in the title to the statute, in the judgment of divorce, and, in the statute itself, was to affect the interest of the wife in the insurance policy and thus cure the situation where a divorced wife could inadvertently receive the proceeds of a perhaps forgotten policy. "Inadvertently receive" should be stressed for the statute does not prohibit the husband or the divorce judgment itself from retaining or renaming the wife as the primary beneficiary. It simply requires affirmative action on the part of the court or husband to retain the divorced wife as the primary beneficiary183 and thus eliminate what could be, and usually appears to be, the inadvertent payment of the life insurance proceeds to a divorced wife. It would therefore appear that by naming Margaret as the beneficiary after the divorce, decedent in no way relinguished any right he had to change the beneficiary in the Travelers policy. In Sturgis v. Sturgis,300 Mich. 438">300 Mich. 438, 2 N.W. 2d 454 456 (1942), the Court held that the legal effect of a divorce decree cannot be altered by a subsequent agreement of the parties, but stands as an adjudication as to the parties rights unless amended or changed by the court. In our view, under the Michigan law, even if the evidence showed that it was the intent of the parties to substitute the name of Margaret as beneficiary on the Travelers policy for the assignment to her of the two policies named in the divorce decree, the attempted change of the provisions of the divorce decree would be ineffective since it was not approved by the court entering the divorce decree. Therefore, since decedent merely named Margaret as beneficiary of a life insurance184 policy under which he had the right to designate the beneficiary, he retained at the date of his death the right to designate the beneficiary of the Travelers Life Insurance Company policy, the proceeds of which were paid to Margaret. This right is an incident of ownership which requires the $80,000 proceeds of that policy to be includable in decedent's estate. In the alternative petitioner contends that if he is not entitled to exclude from decedent's taxable estate the $80,000 paid to Margaret under the Travelers Life Insurance Company policy, then he should be able to deduct as a claim against the estate either (1) the $80,000 paid to Margaret under the policy, (2) the amounts paid to decedent's widow, Joan DeVos, and his sister, Mrs. Detloff, under the two policies which were required under the divorce decree to be assigned to Margaret, or (3) the $16,000 face amount of these two policies. We agree with petitioner with respect to the right of the estate to deduct the proceeds of the two policies required by the divorce decree to be assigned to Margaret as a claim against the estate. 185 Section 2053(a)(4)3 provides that there shall be deducted from the gross estate amounts of any indebtedness in respect of property where the value of decedent's interest therein, undiminished by such indebtedness, is included in the value of the gross estate. Decedent's gross estate as reported on the estate tax return included the $12,177 paid to Joan DeVos by the Prudential Insurance Company under one of the insurance policies which the divorce decree required to be assigned to Margaret, and the $18,632.49 which was paid by the John Hancock Mutual Insurance Company to Mrs. Detloff on the other policy which was required by the divorce decree to be assigned to Margaret. 186 Petitioner does not contend that the proceeds of these policies are not properly includable in the gross estate but contends that because these proceeds are includable in the gross estate the amount thereof is deductible under the provisions of section 2053(a)(4). Since petitioner had not, in fact, assigned the policies to Margaret in accordance with the requirements of the divorce decree, in our view, the amounts paid under these policies were properly included in decedent's gross estate on the estate tax return. See Estate of Chester H. Bowers,23 T.C. 911">23 T.C. 911 (1955). However, as was pointed out in the Bowers case at 920, under the provisions of a property settlement agreement incident to a divorce, an indebtedness might arise under state law against a decedent's estate for the amount of life insurance he was required to keep in force, had he not kept such life insurance in force. If such an obligation exists under state law, it represents an indebtedness within the meaning of section 2053(a)(4) with respect to property included in the gross estate where the proceeds of187 the life insurance policies actually maintained by the decedent have been included in the estate. In the Bowers case we held that such an indebtedness did arise under California law. In the very recent case, Estate of William E. Robinson,63 T.C. 717">63 T.C. 717 (1975), we followed the Bowers case and held that proceeds of insurance policies which a decedent was required under a divorce decree to keep in effect for his ex-wife created a deductible indebtedness against the estate since under the Nevada law there involved, the amount of the insurance which the decedent was required to keep in force would have been an indebtedness against the estate had he not kept the policies in force. In so holding we pointed out that a similar conclusion had been reached in Gray v. United States, an unreported case ( C.D. Cal. 1974, 34 AFTR 2d par. 147,937, 74-2 USTC par. 13,019). The Gray case which also involved California law relied, in reaching its conclusion, on the Bowers case. In our view of the Michigan law, there was an indebtedness of decedent's estate to Margaret in the amount of the life insurance policies which the divorce decree required decedent188 to assign to Margaret. In Morris v. Morris,365 Mich. 365">365 Mich. 365, 112 N.W. 2d 500 (1961), the Supreme Court of Michigan construed a provision of a divorce decree that a husband should maintain in full force and effect certain life insurance policies payable to his ex-wife and was restrained and enjoined from changing the beneficiary of such policy. After the death of the husband his present wife petitioned for a judicial determination that the insurance proceeds, after payment of alimony arrears, belonged to the estate. The Michigan Supreme Court quoted with approval an order of the lower court that the insurance policies were not intended as security for the payment of alimony "but that the same were intended to vest in the plaintiff an interest in said policies of insurance to the extent and on the terms and conditions therein provided and said policies of life insurance having matured on the death of the defendant during the lifetime of the plaintiff, neither the decedent's estate nor the petitioner * * have any interest in the proceeds thereof." The Supreme Court went on to add that the requirements of the decree vested the ex-wife with "the ordinary property rights189 of correspondingly named life beneficiaries." It appears to us that under the holding of Morris v. Morris,supra, here the divorce decree vested Margaret with all property rights to the two insurance policies that were required by the decree to be assigned to her, and therefore she had an enforceable indebtedness in respect of property which was included in the value of decedent's gross estate. Respondent argues that if under the facts here any amount is deductible from decedent's gross estate as an indebtedness to Margaret it is only the small amount of alimony arrearages plus the alimony due for the balance of the 5-year period, a total of $12,075. This is the same argument rejected by the Michigan Supreme Court in Morris v. Morris,supra. Here as in that case, the provision for insurance was a separate provision from that for alimony. It is the right vested in Margaret by the divorce decree to have the policies assigned to her that gives rise to the indebtedness of the estate to Margaret for the proceeds of the policies, not merely the $16,000 face amount of the policies had decedent's death not been accidental. We hold that decedent's190 estate is entitled to deduct $30,809.49 as an indebtedness to Margaret with respect to property included in the gross estate. Respondent finally argues that Margaret made no claim against the estate, and time for filing a claim has expired and therefore under our holding in Estate of Frank G. Hagmann,60 T.C. 465">60 T.C. 465 (1973), the estate should not be entitled to the deduction. There is no merit to this argument since Margaret's claim was in substance paid by her receipt of the $80,000 proceeds of the Travelers Life Insurance Company policy. Although we agreed with respondent that decedent's naming Margaret as beneficiary of this policy without releasing his right to change the beneficiary did not cause the $80,000 to be excluded from decedent's estate or be an indebtedness of the estate to Margaret, we do not agree that this attempted substitution was not sufficient to be in effect a payment by the estate of Margaret's smaller claim against the estate. The final issue is whether petitioner has shown that the late filing of the estate tax return was due to reasonable cause and not to willful neglect so that the addition to tax for failure to timely file the return191 is inapplicable. The evidence shows that after requesting and failing to receive a 90-day extension of time for filing the estate tax return, the administrator did not file a return until almost one year after the date the return was due to be filed, even though he was aware of the due date of the return. The record here shows that 4-1/2 months prior to the due date of the return the administrator of decedent's estate knew that the value of the estate was sufficient to require the filing of an estate tax return. Although the administrator testified at some length in this case as to problems encountered in determining the assets of the estate in order to file an accurate estate tax return, a review of this testimony discloses nothing which we consider to show that with reasonable diligence the administrator could not have ascertained with enough degree of accuracy the assets of the estate to file an estate tax return by the due date thereof, or certainly within a very short period of time after receiving the rejection of his request for an extension of time to file the return. A certified public accountant was retained by the administrator to prepare the estate tax return for decedent's192 estate 4-1/2 months before the due date of the return. This accountant testified at some length. We have considered his testimony but conclude that nothing therein shows reasonable cause for the failure to file the estate tax return on its due date or within a very short period of time after receiving the denial of the requested extension of 90 days for filing the return. The record does not even show that after receiving the rejection of this requested extension that the cause of the rejection was remedied and an attempt again made to obtain an extension for a reasonable length of time for filing the return. We have also considered the testimony of the lawyer who testified as to the reasonableness of petitioner's late filing of the estate tax return and conclude that nothing contained in his testimony supports a finding that the late filing was due to reasonable cause. The record is clear that the administrator knew by April 1968 of the $100,000 Travelers Life Insurance Company policy which paid the balance due on the stock purchase agreement which decedent had with three individuals and knew about other stock in ROHT owned by decedent. It is also apparent that he had fair knowledge193 of the value of that stock before the due date of the estate tax return. It is also clear that well before the due date of the return, the administrator knew of Margaret's divorce from decedent and could easily have obtained a copy of the divorce decree and become alerted to the two insurance policies mentioned in that decree. The record also shows that the administrator, shortly after his appointment, began to participate in the affairs of ROHT and that he was informed by Mr. Whipple, who was the person who delivered the Travelers Life Insurance Company checks to Margaret, about decedent's ownership of 28,600 shares of stock in ROHT. It would seem logical that participating in the management of ROHT, the administrator could easily have ascertained what insurance, if any, the company had carried for decedent. Reasonable cause for failure to timely file a tax return has been defined to be the exercise of ordinary business care and prudence. Estate of FrankDuttenhofer,49 T.C. 200">49 T.C. 200, 204 (1967), affirmed per curiam 410 F. 2d 302 (6th Cir. 1969). As we pointed194 out in the Duttenhofer case, an individual does not act as an ordinarily intelligent and prudent businessman "by blindly acquiescing in all" of an attorney's "decisions and thus giving him effective control of administering the estate, whereas this responsibility was basically" his own. The administrator here was a lawyer who had knowledge of the due date of the estate tax return as well as knowledge of the fact that his request for an extension of time to file the return had been denied. It was his duty to file the return as soon as reasonably feasible after the denial of the request for extension. The fact that he employed an accountant to actually prepare the return does not justify his failure to see that a timely return was filed. As we pointed out in William H. Maudlin,60 T.C. 749">60 T.C. 749, 762 (1973), the law is well settled that a taxpayer cannot avoid his obligation to file a timely return by delegating to another the responsibility for preparing and filing his return. The fact that his obligation to file a timely return cannot be delegated to another should be particularly apparent to a lawyer who should have a thorough understanding of his own legal responsibility. 195 See Estate of William T. Mayer,43 T.C. 403">43 T.C. 403 (1964), affirmed per curiam 351 F. 2d 617 (2d Cir. 1965). The cases relied on by petitioner in support of his contention that his reliance on an accountant to file the estate tax return constitutes reasonable cause are all distinguishable on their facts from the instant case. This record does not show that petitioner ever received definite advice from the accountant that the return could be filed nearly one year after its due date without incurring the addition to tax for late filing. See R. A. Bryan,32 T.C. 104">32 T.C. 104, 133 (1959), affirmed on this issue 281 F. 2d 238 (4th Cir. 1960). The record here shows that well before the due date of the return petitioner knew the estate tax return was due and its due date. See Paula Construction Co.,58 T.C. 1055">58 T.C. 1055, 1060 (1972). Here petitioner had not supplied the accountant with all the necessary information prior to the due date of the return and requested him to prepare a proper return from that information as had the taxpayer in Haywood Lumber and Mining Co. v. Commissioner,178 F. 2d 769 (2d Cir. 1950),196 modifying 12 T.C. 735">12 T.C. 735 in which the Second Circuit held that such reliance on an expert was reasonable cause for late filing of a personal holding company tax return. This case is likewise distinguishable from In re Fisk's Estate,203 F. 2d 358 (6th Cir. 1953), reversing a Memorandum Opinion of this Court, relied on by petitioner. In that case the Second Circuit held that reliance by the executor on an attorney who apparently thought that the date of mailing the return would be considered the date of filing was reasonable cause for the return being filed one day late. On the facts here, we sustain respondent in his addition to tax for failure to timely file the estate tax return. Decision will be entered under Rule 155.Footnotes1. All references are to the Internal Revenue Code of 1954, unless otherwise noted.↩2. Mich. Stat. Ann. Section 25.131 (1974) Provision in lieu of dower; inclusion in decree, effect on property claims; determination of wife's rights respecting life insurance or annuity contracts, company's liability discharged. Sec. 1. When any decree of divorce is hereafter granted in any of the courts of this state, it shall be the duty of the court granting such decree to include in it a provision in lieu of the dower of the wife in the property of the husband, and such provision shall be in full satisfaction of all claims that the wife may have in any property which the husband owns or may thereafter own, or in which he may have any interest. Hereafter every decree of divorce shall determine all rights of the wife in and to the proceeds of any policy or contract of life insurance, endowment or annuity upon the life of the husband in which she was named or designated as beneficiary, or to which she became entitled by assignment or change of beneficiary during the marriage or in anticipation thereof, whether such contract or policy was heretofore or shall hereafter be written or become effective, and unless otherwise ordered in said decree such policy or contract shall thereupon become and be payable to the estate of the husband or to such named beneficiary as he shall affirmatively designate: Provided, That the company issuing such policy or contract shall be discharged of all liability thereon by payment of its proceeds in accordance with its terms, unless before such payment the company shall have written notice, by or on behalf of the insured or the estate of the insured or one of the heirs of the insured, or any other person having an interest in such policy or contract of a claim thereunder and the aforesaid divorce.↩3. SEC. 2053. EXPENSES, INDEBTEDNESS, AND TAXES. (a) General Rule.--For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts-- * * * (4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent's interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620939/	Lois Blum, Petitioner v. Commissioner of Internal Revenue, RespondentBlum v. CommissionerDocket No. 22853-85United States Tax Court86 T.C. 1128; 1986 U.S. Tax Ct. LEXIS 101; 86 T.C. No. 65; May 29, 1986, Filed 101 An appropriate order of dismissal for lack of jurisdiction will be entered. On the 90th day after the notice of deficiency was mailed, P delivered her petition to a private delivery service and contracted for express delivery of the original petition and electronic transmission of a copy of the petition via satellite to be delivered that same day. Pursuant to the terms of delivery, a copy of the petition was electronically reprinted in Washington, D.C., and was tendered to the Court by the private delivery service that same day; however, the Court refused to receive the electronically transmitted copy. The original petition was hand-delivered to the Court and filed on the 91st day. Held, an electronically transmitted copy of a petition is a communication similar to a telegram, cablegram, petition. Rule 34(a)(1), Tax Court Rules of Practice and Procedure.Held, further, P's petition was not timely filed as required by sec. 6213(a), I.R.C. 1954, as amended. Blank v. Commissioner, 76 T.C. 400 (1981). Douglas W. Thomson, for the petitioner. 1Gordon L. Gidlund and Will E. 102 McLeod, for the respondent. Sterrett, Chief Judge. Cantrel, Special Trial Judge. STERRETT; CANTREL1129 OPINIONRespondent's motion to dismiss for lack of jurisdiction filed herein was assigned to Special Trial Judge Francis J. Cantrel pursuant to section 7456(d)(4), Internal Revenue Code of 1954 as amended, and Rule 180, Tax Court Rules of Practice and Procedure. After a review of the record, we agree with and adopt his opinion which is set forth below.OPINION OF THE SPECIAL TRIAL JUDGECantrel, Special Trial Judge: This case is before the Court on respondent's motion to dismiss for lack of jurisdiction filed on August 15, 1985. Respondent seeks dismissal on the ground that the petition was not filed within the time prescribed by section 6213(a) or section 7502. 2 Respondent in his notice of deficiency issued to petitioner on April 3, 1985, determined deficiencies in petitioner's Federal income taxes and additions to the tax for the taxable years 1981 to 1983, inclusive, in the following amounts:Additions to tax, I.R.C. 1954YearsIncome taxSec. 6653(b)Sec.6653(b)(2)Sec.66111981$ 1,217$ 60919829,4214,7111103 $ 942198381240621130 The statutory notice of deficiency was mailed on April 3, 1985, by U.S. certified mail (no. 179,028) to petitioner at her last known address in Center City, Minnesota, pursuant to section 6212. Petitioner duly received the notice of deficiency in time to file a timely petition in this Court.On July 2, 1985, the 90th day after the notice of deficiency was mailed (and not a Saturday, Sunday, or legal holiday in the District of Columbia) petitioner's attorney delivered or caused to be delivered a petition for redetermination of the deficiencies to an office of the Federal Express Corp. (hereinafter referred to as Federal Express) in St. Paul, Minnesota. A contract of delivery was executed which called for delivery of a copy via satellite ("Zapmail") and express delivery of the original. Pursuant to the delivery terms, the petition was scanned by satellite on July 2, 1985, at 10:58 a.m. in St. Paul, Minnesota, and a copy of the petition was electronically printed in Washington, D.C. The Washington, D.C., office of Federal Express proceeded to tender the electronically transmitted copy to the Court at 12:40 p.m. that 104 same day, however the package was refused by an employee of the Court's mailroom. On July 3, 1985, the petition which the Court now has in this record was hand-delivered to the Court's mailroom by Federal Express. That petition was received and duly filed on July 3, 1985, the 91st day.Petitioner filed an objection and supplemental memorandum on September 12 and October 29, 1985, respectively, in opposition to respondent's motion to dismiss for lack of jurisdiction now under consideration. Therein petitioner argues that the motion should be denied on the ground that a copy of the petition was timely delivered via Federal Express Zapmail to the Court on the 90th day. 3 Alternatively, petitioner contends that the petition was timely mailed on July 2, 1985, and, therefore, is deemed timely filed pursuant to section 7502(a)(1).A hearing on respondent's motion was conducted in Washington, D.C., 105 on December 18, 1985. No appearance was made by or on behalf of petitioner. Respondent, by and 1131 through his motion and at the hearing, contends that we lack jurisdiction over this matter because petitioner did not timely file the petition in this case within the time prescribed by section 6213(a). Respondent further asserts that the provisions of section 7502 do not apply. On the basis of this record, we must, and do, agree with respondent.It is clear that this Court has jurisdiction to proceed on the merits of petitioner's case only if we find that a timely petition has been filed. 4106 The 90-day filing period is jurisdictional and cannot be extended. Estate of Cerrito v. Commissioner, 73 T.C. 896">73 T.C. 896, 898 (1980); Joannou v. Commissioner, 33 T.C. 868">33 T.C. 868, 869 (1960); Rich v. Commissioner, 250 F.2d 170">250 F.2d 170 (5th Cir. 1957). In resolving this issue we must, at the outset, determine whether the electronically transmitted copy which was tendered to the Court on the 90th day should be regarded as effective for the purpose of establishing jurisdiction, notwithstanding that it does not conform to the Court's Rules.It is clear to us that petitioner went to the trouble of contracting to have a copy of her petition electronically transmitted and hand-delivered to the Court specifically to meet the 90-day filing requirement. She apparently was unaware, however, of this Court's practice not to receive any electronically transmitted documents. The Court's practice not to receive such documents is based upon a Rule of the Court which has been in existence for over 40 years.Section 7453 provides that proceedings of the Tax Court shall be conducted in accordance with such Rules of Practice and Procedure (other than Rules of Evidence) as the Court may prescribe. Pursuant to this authorization, we have over many years developed a comprehensive set of Rules which are designed and calculated to increase our efficiency in adjudicating genuine tax disputes. In 1973, the Rules of Practice and Procedure of this Court were substantially revised, adopted, and promulgated, 107 effective January 1, 1974. Therein appeared Rule 34(a)(1) pertaining to petitions in deficiency or liability actions. Rule 34(a)(1), insofar 1132 as it has application to this case provides: "No telegram, cablegram, radiogram, telephone call, or similar communication will be recognized as a petition." This provision, while new to Rule 34, derives from Rule 7, Board of Tax Appeals Rules of Practice and has been a part of our Rules since 1942. See Rule 7, Board of Tax Appeals Rules of Practice (June 1, 1942 rev.) 5108 Pursuant to our Rule, it has been the long-standing practice of this Court not to accept any such documents for jurisdictional purposes. See, e.g., Joannou v. Commissioner, supra at 870, where more than 26 years ago we said -- "The Court tries to be liberal in regarding documents filed with it within the 90-day period as petitions, but it has no right to be liberal in extending its jurisdiction. Rule 7(c)(3) of the Court's Rules of Practice expressly provides that no telegram will be recognized as a petition. I.J. Rosenberg, 32 B.T.A. 618">32 B.T.A. 618." The record shows that petitioner's electronically transmitted copy was refused by an employee of the Court's mailroom. This action is consistent with the Court's Rules and its practice not to receive 109 any communications that are similar to a telegram, cablegram, or radiogram. This action is also in accord with the Court's Press Release issued September 28, 1984, of which we take judicial notice and reproduce in full below wherein we clarified that the Court will not receive any electronically transmitted documents. 61133 It is petitioner's burden to show that the document tendered to the Court on the 90th day was a petition and that this Court has jurisdiction. Harold Patz Trust v. Commissioner, 69 T.C. 497">69 T.C. 497, 503 (1977), and cases cited therein. However, petitioner has not presented 110 any evidence or authority to support a finding that the electronically transmitted copy is not a "similar communication" within the meaning of Rule 34(a)(1). We have not previously considered the consequences of tendering a document that is reproduced via satellite; however, we see no basis for according "Zapmail" or any other kind of electronically transmitted mail the authenticity which we have refused to extend to telegrams, radiograms, or cablegrams. We will not accept documents that are the products of such media for jurisdictional purposes. 7111 Accordingly, we hold that an electronically transmitted copy of a petition is a communication similar to a telegram, cablegram, radiogram, or telephone call and, therefore, will not be recognized as a 1134 petition. Rule 34(a)(1). The clerk properly refused to accept the electronically transmitted document on July 2, 1985. In Blank v. Commissioner, 76 T.C. 400 (1981), 112 we considered petitioner's alternative argument and rejected it. We held that section 7502 does not apply when delivery is made by a private delivery service rather than the U.S. Postal Service. 76 T.C. at 407. Accordingly, the petition received and filed by the Court on July 3, 1985, the 91st day, was not timely filed as required by section 6213(a). 8113 Respondent's motion will be granted.An appropriate order of dismissal for lack of jurisdiction will be entered. Footnotes1. Mr. Thomson, who is admitted to practice before this Court, subscribed the petition on petitioner's behalf.↩2. All section references are to the Internal Revenue Code of 1954 as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50% of the interest due on $ 9,421.2. 50% of the interest due on $ 812.↩3. The Zapmail package, including any documents contained therein, which was refused by the Court on July 2, 1985, is not in evidence. This may be because the package was not returned to petitioner by Federal Express; however, we are speculating since the record is entirely silent on this point.↩4. Sec. 6213(a) provides in pertinent part -- "Within 90 days * * after the notice of deficiency authorized in section 6212 is mailed (not counting Saturday, Sunday, or a legal holiday in the District of Columbia as the last day), the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency."5. As it originally appeared in 1942, Rule 7 provided, in pertinent part -- "No telegram, cable, radio, or similar message will be recognized as a petition on and after July 1, 1942." In 1948, the provision was revised to read as it does today. See Rule 7(c)(3), Tax Court Rules of Practice and Procedure (Dec. 15, 1948 ed.) The Note (60 T.C. 1084">60 T.C. 1084) to Rule 34(a) states, in part, "The provision of present T.C. Rule 7(c)(3), that certain media for communicating a petition are insufficient, is continued because of the problems of authenticity and definiteness."The provision not to recognize telegrams, cablegrams, and similar messages was added to the Rules in response to the appellate court decision in McCord v. Commissioner, 164">123 F.2d 164 (D.C. Cir. 1941). See H. Dubroff, The United States Tax Court 413 (1979). In McCord↩, the United States Court of Appeals for the District of Columbia reversed our dismissal of an untimely telegraphic petition. At the time of that decision it was the practice of the Court to receive such petitions and the appellate court concluded that the untimeliness was due to our method of handling that petition.6. UNITED STATES TAX COURTWASHINGTON, D.C. 20217September 28, 1984PRESS RELEASEChief Judge Howard A. Dawson, Jr.↩, of the United States Tax Court, announced today that, with respect to electronic mail, the public is cautioned that the United States Tax Court will not accept from any courier documents electronically transmitted by facsimile process or otherwise. Such documents do not conform with the Court's Rules of Practice and Procedure as to form and style. Anyone facing an imminent deadline is reminded that a United States Postal Service postmark date is controlling for determining timeliness of documents.7. Such documents, by their very nature, do not comport with our Rules regarding original, signed documents and do not comply with the specifications for form and style of papers. There are important reasons behind the Rules of Practice and Procedure of this Court which would be entirely lost should we fail to enforce its strictures.With regard to the form and style of papers, Rule 23, in relevant part, states:(a) Caption, Date, and Signature Required: All papers filed with the Court shall have a caption, shall be dated, and shall be signed as follows:* * * (3) Signature: The original signature, either of the party or his counsel, shall be subscribed in writing to the original of every paper filed by or for that party with the Court, except as otherwise provided by these Rules. * (b) Number Filed: For each paper filed in Court, there shall be filed four conformed copies together with the signed original thereof * ** * * (g) Return of Papers for Failure to Conform to Rule: The Clerk may return [or refuse to accept] without filing any paper that does not conform to the requirements of this Rule.[Emphasis added.]In addition see Rule 34, pertaining to petitions, which provides in pertinent part -- * * (b) * : The petition in a deficiency * * action shall contain * * : * * (7) The signature * * of each petitioner or his counsel.* * * *(d) Number Filed: For each petition filed, there shall be a signed original together with two conformed copies.[Emphasis added.]↩8. In closing, we add that petitioner could have mailed an envelope containing the original petition by U.S. ordinary mail or sent it by registered or certified mail as provided in sec. 7502(c) and the regulations issued thereunder. Estate of Moffat v. Commissioner, 46 T.C. 499">46 T.C. 499, 502 (1966). Had petitioner properly mailed the petition by U.S. registered or certified mail on July 2, 1985, the petition would have been deemed timely filed whether or not actually received by the Court. Sec. 301.7502-1(d)(1), Proced. & Admin. Regs. Storelli v. Commissioner, 86 T.C. 443">86 T.C. 443 (1986). Finally, petitioner has not completely lost her day in Court. She may pay the deficiency, file a claim for refund and, if that claim is denied, or the Commissioner fails to act thereon within 6 months, she may commence an action in the U.S. District Court for the locale in which she resides or the U.S. Claims Court in Washington, D.C., to recover the tax paid. Drake v. Commissioner, 554 F.2d 736">554 F.2d 736, 739↩ (5th Cir. 1977).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620940/	Estate of Carrie Grossman, Trixy G. Lewis, Executrix, Petitioner, v. Commissioner of Internal Revenue, RespondentGrossman v. CommissionerDocket No. 58005United States Tax Court27 T.C. 707; 1957 U.S. Tax Ct. LEXIS 277; January 24, 1957, Filed 277 Decision will be entered for the respondent. Estate Tax -- Gross Estate -- Principal of Inter Vivos Trust Includible in Gross Estate -- Enjoyment Subject at Date of Death to Any Change Through Exercise of a Power Alone or in Conjunction With Others to Alter, Amend, or Revoke. -- Decedent created a trust for the benefit of her three children, naming herself as sole trustee. As trustee she had the right under paragraph III to apply to the use of any beneficiary so much of principal as she should deem advisable, in her sole and uncontrolled discretion. The trust also provided in paragraph IX that upon written request of a majority of the beneficiaries and written consent of the settlor the trust could be terminated and all principal and remaining income distributed in accordance with the terms of the request. Held, (1) the transfer was subject to a power "by the decedent alone or in conjunction with any person, to alter, amend, or revoke" within the meaning of section 811 (d) (2), I. R. C. 1939; (2) the amount includible in the gross estate may not be diminished by the value of the life estates. Naomi Ranson, Esq., for the petitioner.Ellyne E. Strickland, Esq., for the respondent. Raum, Judge. RAUM707 OPINION.Respondent has determined a deficiency in estate tax in the amount of $ 34,612.47 with respect to the Estate of Carrie Grossman, who died in 1951. The sole issue is whether the principal of a trust established by her in 1930 is includible in her gross estate under section 811 (d) (2) of the Internal Revenue Code of 1939. The facts have been stipulated.On December 20, 1930, the decedent created a trust for the benefit of her three adult children (Lillian G. Lignante, Trixy G. Lewis, and William Leonard Grossman) naming herself as the sole trustee. The term of the trust was the settlor's life, but it was subject to termination as hereinafter indicated. The income279 was payable to the three children in accordance with a specified formula until November 1, 1933, and thereafter to be equally divided among them; and, in the event of death of a child, provision was made for payment of the income that would otherwise have been payable to such child. Upon termination of the trust, the entire corpus and unpaid income were 708 to be divided into three parts, one for each child; if any child should not then be living, then his or her share was to be paid over in accordance with a testamentary power of appointment given to such child, and, in default of appointment, to such child's next of kin.The settlor, as trustee, retained broad powers of administration of the trust property. In addition, the trust instrument contained the following pertinent provisions:III. Said Trustee may apply to the use of said LILLIAN G. LIGNANTE, TRIXY G. LEWIS and WILLIAM LEONARD GROSSMAN, or any one or more of them, so much of the principal or corpus of the trust as she, in her sole and uncontrolled discretion, may deem advisable.* * * IX. This trust shall be irrevocable; provided, however, that if during the existence thereof a majority of the children of the280 Settlor shall in writing signed by them, and addressed and delivered to said Settlor, request that this trust be terminated or revoked, and the principal thereof distributed to the persons and in the proportions designated in such writing, and if the Settlor shall in writing assent thereto, then this trust shall be terminated or revoked and the corpus of the trust distributed in accordance with such written request and assent; and no other beneficiary named herein shall have or be deemed to have any interest in this agreement or trust as shall have the effect of preventing its said revocation or termination by a written agreement as aforesaid between the Settlor and a majority of her three children.In 1927, the decedent and her husband had created a trust, the terms of which closely paralleled those of the trust here in controversy. After the husband's death, the 1927 trust was terminated by a written request dated December 15, 1930, made by a majority of the beneficiaries and a written instrument dated December 20, 1930, in which the surviving spouse assented to termination. The assets of the 1927 trust then became the corpus of the 1930 trust which is now before us. 1281 The corpus of the 1930 trust at the date of the settlor's death had a value of $ 105,229.30, and it is the correctness of the Commissioner's action in determining that this amount is includible in her gross estate that is before us for review. The applicable statutory provision is set forth in the margin. 2282 709 We think that the Commissioner's determination must be sustained by reason of either paragraph III or paragraph IX of the trust instrument. Paragraph III is phrased in sweeping terms. Thereunder, the decedent retained the power to "apply to the use of" her three children, "or any one or more of them, so much of the principal or corpus of the trust as she, in her sole and uncontrolled discretion, may deem advisable." That power is not limited, as contended by petitioner, to the "need" of any particular child (cf. Matter of Wentworth, 230 N. Y. 176, 129 N.E. 646">129 N. E. 646), nor is the power so restricted that only one-third of the corpus could be paid over to any particular child. Paragraph III gives the decedent the broad power, in her sole and uncontrolled discretion, to pay over any part of the corpus for the benefit of any one of her children, thereby diminishing or even extinguishing the interests of the other beneficiaries. Plainly, such power is one "to alter, amend, or revoke" within the meaning of section 811 (d) (2). Du Charme's Estate v. Commissioner, 164 F. 2d 959, 169 F. 2d 76283 (C. A. 6).Moreover, wholly apart from the power spelled out in paragraph III, the provisions of paragraph IX are fatal to petitioner's position. Those provisions gave the settlor the power, acting in conjunction with a majority of her children, to terminate or revoke the trust. It is now well settled that a power to "terminate" is comprehended within a power to "alter, amend, or revoke" ( Lober v. United States, 346 U.S. 335">346 U.S. 335; Commissioner v. Estate of Holmes, 326 U.S. 480">326 U.S. 480; Thorp's Estate v. Commissioner, 164 F. 2d 966 (C. A. 3), certiorari denied 333 U.S. 843">333 U.S. 843); and it is irrelevant whether the decedent's participation initiates the termination, or, as here, is in the nature of a consent after others have set the machinery in motion, it being sufficient under the statute merely that she act "in conjunction" with the others ( Thorp's Estate v. Commissioner, supra, at pp. 967-968; Du Charme's Estate v. Commissioner, 164 F. 2d 959, 962).We do not agree with petitioner's284 final contention that, in any event, the amount to be included in the gross estate must be reduced by the value of the life estates of decedent's children. Even assuming such estates to be "vested" (cf. Lober v. United States, supra, at 336), all of them were clearly defeasible. 3The Commissioner's determination must be approved in all respects.Decision will be entered for the respondent. Footnotes1. The settlor subsequently, in 1937, added securities valued at $ 38,258.66 to the 1930 trust. Such securities had previously been part of the corpus of a revocable trust established by the settlor in 1931.↩2. SEC. 811. GROSS ESTATE.(d) Revocable Transfers. -- * * *(2) Transfers on or prior to June 22, 1936. -- To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Except in the case of transfers made after June 22, 1936, no interest of the decedent of which he has made a transfer shall be included in the gross estate under paragraph (1) unless it is includible under this paragraph;↩3. The original holding of the Court of Appeals in Du Charme's Estate v. Commissioner, 164 F. 2d 959 (C. A. 6), relied upon by petitioner, that a life estate must be excluded, was modified on rehearing to reach the contrary result. 169 F. 2d 76↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620943/	LINDSAY D. FRANKLIN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentFranklin v. CommissionerDocket No. 14451-82.United States Tax CourtT.C. Memo 1984-278; 1984 Tax Ct. Memo LEXIS 393; 48 T.C.M. (CCH) 158; T.C.M. (RIA) 84278; May 24, 1984. 393 Petitioner filed a document which purported to be a Form 1040 but which was altered in such a manner as to point out petitioner's frivolous position that wages are not subject to income tax. Petitioner instituted this proceeding claiming that wages are not subject to income tax. Held, respondent's motion to dismiss for petitioner's failure properly to prosecute is granted with respect to the deficiency and the addition to tax under section 6653(a). Held further, the document filed by petitioner is not a return and petitioner is liable for the addition to tax under 6651(a)(1). Held further, damages are awarded to the United States in the amount of $500 under section 6673. 394 Mark E. Rizik, for the respondent. CLAPPMEMORANDUM OPINION CLAPP, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the year 1980 in the amount of $9,051.40 and an addition to tax for that year in the amount of $452.57 under the provisions of section 6653(a)1. The respondent alleged in an amended answer that the petitioner was liable for a 25 percent 395 addition to tax under the provisions of section 6651(a)(1). The issues for decision are (1) whether petitioner is liable for the income tax deficiency as determined by the respondent; (2) whether petitioner is liable for an addition to tax under section 6653(a) for negligence or intentional disregard of rules and regulations; and (3) whether petitioner failed to file a document which constitutes a Federal income tax return for the taxable year 1980, rendering him liable for an addition to tax under section 6651(a). The petitioner, Lindsay D. Franklin, resided at Ypsilanti, Michigan, at the time he filed his petition in this396 case. Petitioner submitted to the Internal Revenue Service a document, dated April 5, 1981, which purported to be a Form 1040. On this document, the petitioner reported the amount of $29,042.47 as wages and attached a Form W-2 reflecting this amount. On line 23 of the document, petitioner deducted the same amount under the heading of "nontaxable receipts." In the notice of deficiency issued to petitioner for 1980, respondent included the amount of the wages, $29,042.47, in taxable income, and determined a deficiency of $9,051.40 and an addition to tax of $452.57 under section 6653(a). Petitioner filed a petition with this Court on June 23, 1982, contending that the amount of $29,042.47 represents "gross receipts for lost property/labor" and further stating that: "being that labor is property, the wage receipts of the petitioner as reported on his W-2 statements reflect only a return of lost property * * * therefore, the amount is not includable in gross income, adjusted gross income or taxable income." Petitioner also denies that he is liable for the negligence addition. Respondent timely filed an answer and requests that the Court award damages to the United States in the397 amount of $500 in accordance with section 6673. In his reply, petitioner denies that he is liable for damages, alleging that his petition raised factual issues which have never been fully considered. Respondent filed an amendment to answer alleging that the document petitioner filed is not a tax return as required by section 6012 and that petitioner is liable for a 25 percent addition to tax pursuant to section 6651(a) for failure to file a return. Petitioner did not file a reply, therefore, the affirmative allegations in the amended answer are deemed denied. Rule 37(c). This case was called from the calendar for the trial session of the Court in Detroit, Michigan, on October 17, 1983. There was no appearance by or on behalf of the petitioner. On October 18, 1983, the case was recalled, and the petitioner again did not appear. At such time, respondent moved for judgment on the deficiency and the negligence addition based on the grounds that petitioner failed properly to prosecute. Respondent then introduced evidence with respect to the petitioner's liability for the addition to tax under section 6651(a). The respondent submitted into evidence an official blank 1980 Form 1040 and398 a certified copy of the petitioner's purported 1980 return and called Revenue Agent Robert Bednarczyk to testify as to the differences. The document which petitioner filed purports to be an official Form 1040 but differs in several respects. An official 1980 Form 1040 contains an "Adjustments to Income" section consisting of the following entry lines: 23Moving expense (attach Form 3903 or 3903F)24Employee business expenses (attach Form 2106)25Payments to an IRA (enter code from page 10---)26Payments to a Keogh (H.R. 10) retirement plan27Interest penalty on early withdrawal of savings28Alimony paid29Disability income exclusion (attach Form 2440)30Total Adjustments. Add lines 23 through 29The document submitted by petitioner is virtually identical to an official 1980 Form 1040 except that it replaces the "Adjustments to Income" section with an "Adjustments to Receipts" section and consists of the following entry lines: 23Non-taxable receipts24Title 26, Section 1(a)(b)(c)(d)25 Brushaber v. Union Pacific R.R., 240 U.S. 126 Stanton v. Baltic Mining Co., 240 U.S. 10327 Eisner v. Macomber, 252 U.S. 18928 Murdock v. Penn., 319 U.S. 10529Penn Mutual Indemnity Co. v. Comm'r, 32 T.C.(1959)30Total adjustments. Add lines 23 through 29399 In addition, in the signature section of page two, the following sentence has been added: "Signed involuntarily, under threat of statutory punishment." At the bottom of the document is printed the phrase "Copyright 1980, Eugene J. May." By letter dated October 24, 1983, Mr. Franklin requested that his hearing be rescheduled. He stated that to the best of his knowledge he did not know of the original hearing set for October 17, 1983. Also he states that he was indisposed on that date because he and his son were ill and his wife was operated on. Petitioner's request for another hearing date is denied. According to Court records, a notice of hearing was sent to petitioner by certified mail on July 26, 1983, at the same address indicated on his letter and the notice was not returned. Petitioner has not submitted any evidence other than his self-serving statement as to his inability to attend. In any event, a hearing on the merits would not serve any purpose. Petitioner does not dispute the facts. Petitioner does not deny in his petition that he received the wages referred to in the notice; he is contending instead that such wages are not taxable. This frivolous contention400 has been considered and rejected by this Court in numerous prior cases, including a case involving petitioner for previous taxable years (Docket No. 4425-82, Order and Decision entered June 28, 1982), and merits no further discussion. See Rowlee v. Commissioner,80 T.C. 1111">80 T.C. 1111, 1119-1122 (1983). With respect to the section 6653(a) addition, the petitioner has merely stated the conclusion that he did not act out of intentional disregard for the rules and regulations. 2 As the Court stated in its Memorandum Sur Order, granting respondent's motion for summary judgment in the prior case involving the petitioner: The addition to tax provided by section 6653(a) will not be applicable when a "bona fide dispute which presents substantial issues of law and fact" exists. Scott v. Commissioner [Dec. 32,463], 61 T.C. 654">61 T.C. 654, 663 (1974). Petitioner's belief, however genuine, that his wages did not constitute income does not present such a dispute. It has been clear for decades that wages are income. Therefore we find that no bona fide dispute existed as to the taxability401 of petitioner's wages and consequently that petitioner's underpayment of tax was due to negligence or intentional disregard of rules and regulations. [Footnote omitted] [Miller v. Commissioner,T.C. Memo. 1981-296.]We find this language to be applicable here.Petitioner has the burden of proof with respect to the deficiency and the negligence addition stated in the notice. Rule 142(a). With respect to these issues, respondent's motion to dismiss is granted. Rule 123(b). The remaining issue is whether petitioner is liable for the addition to tax under section 6651 for failure to file402 a return. Because this issue was raised by respondent for the first time in his amended answer, respondent bears the burden of proof with respect thereto. Rule 142(a). Respondent has produced the official 1980 Form 1040 and the document submitted by petitioner as a Form 1040. The differences are apparent on their face. The question of what constitutes an adequate return is a legal one. Jarvis v. Commissioner,78 T.C. 646">78 T.C. 646, 653 (1982). A return must contain sufficient information from which respondent can compute and assess a tax liability. Commissioner v. Lane-Wells, Co.,321 U.S. 219">321 U.S. 219, 222-223 (1944); Germantown Trust Co v. Commissioner,309 U.S. 304">309 U.S. 304, 309 (1940), Reiff v. Commissioner,77 T.C. 1169">77 T.C. 1169, 1177 (1981). A return will qualify as such even though not perfectly accurate or complete, if there has been an honest and genuine endeavor to satisfy the requirements of a return. Zellerbach Paper Co. v. Helvering,293 U.S. 172">293 U.S. 172, 180 (1934); Florsheim Bros. Drygoods Co. v. United States,280 U.S. 453">280 U.S. 453, 462 (1930).403 United States v. Moore,627 F.2d 830">627 F.2d 830, 834-835 (7th Cir. 1980). Reiff v. Commissioner,supra.In United States v. Moore,supra, the taxpayer had submitted Forms 1040 with Fifth Amendment objections and reported "de minimis" amounts of interest and dividend income. The Court, in holding that the forms did not constitute returns, stated-- The mere fact that a tax could be calculated from information on a form, however, should not be determinative of whether the form is a return. * * there must also be an honest and reasonable intent to supply the information required by the tax code. * * * [Citations omitted.] * * * In the tax protestor cases, it is obvious that there is no "honest and genuine" attempt to meet the requirements of the code. In our self-reporting tax system the government should not be forced to accept as a return a document which plainly is not intended to give the required information. See Jarvis v. Commissioner,supra at 654. Here petitioner has not made an honest and genuine404 endeavor to file a return. The document which was filed is not an official Form 1040. 3While courts have accepted as returns documents which were not the prescribed forms, they have done so where there is a good faith effort to satisfy the requirements of a return. Zellerbach Paper Co. v. Helvering,supra.Hartford-Connecticut Trust Co. v. Eaton,34 F.2d 128">34 F.2d 128 (2d Cir. 1929). American Circus Joint Venture v. Commissioner,39 B.T.A. 605">39 B.T.A. 605, 611-612 (1939). Instead of filing the prescribed Form 1040, petitioner filed a document which purports to be the official Form 1040 but is altered in such a manner as to point out petitioner's frivolous position that wages are not taxable. Petitioner reported the amount of his wages only to deduct them under the heading of "nontaxable receipts." As a result of this impermissible procedure, petitioner disavowed any tax liability. 4 The altered form clearly was not designed to inform the Commissioner of the petitioner's tax liability. It does not "on its face plausibly purport to be in compliance" 405 with the law. See Badaracco v. Commissioner, 464 U.S. (Jan. 17, 1984). It was instead designed simply to advance petitioner's patently frivolous position. It is important in this context to consider the purpose for requiring returns to be filed. As the Supreme Court in Commissioner v. Lane-Wells, Co.,supra at 223, stated: "Congress has given discretion to the Commissioner to prescribe, by regulation, forms of returns and has made it the duty of the taxpayer to comply. It thus implements the system of self-assessment which is so largely the basis of our American scheme of income taxation. The purpose is not alone to get tax information in some form but also to get it with such uniformity, completeness, and arrangement that the physical406 task of handling and verifying returns may be readily accomplished * ." If the taxpayer is permitted to alter the prescribed return form in any manner he chooses so that he can protest his tax liability rather than report it, he has then effectively undermined the principle of self-assessment which, as the Supreme Court stated above, is so important to the administration of our tax laws. Further, it is particularly important in this computer age that returns are in some type of uniform format so that they can be readily examined, verified, and processed by modern state of the art electronic data processing equipment. To accept this document as a return "would disrupt the administration of the tax laws and serve to undermine the integrity of our self-assessment tax system." Reiff v. Commissioner, supra, at 1179. The Internal Revenue Service would be left in the Dark Ages in trying to cope with the volume of returns with which it is faced in the late twentieth century. We conclude that the document filed by the petitioner is not a return within the meaning of section 6651(a). In so concluding, we follow the court-reviewed opinion in Beard v. Commissioner,407 82 T.C. (May 24, 1984), which held that a document similar to the one present in this case was not a return. As is apparent from the face of the document filed, petitioner did not make a good faith effort to file an authentic return, but rather filed a document which set forth petitioner's frivolous protest position. We find petitioner's failure to file a proper return was deliberate and in open disregard of the statute and respondent's regulations. Petitioner's failure to file a return is due to willful neglect and not due to reasonable cause. Therefore, petitioner is liable for the addition to tax under section 6651(a). This section imposes an addition to the amount required to be shown as tax up to a maximum of 25 percent. Section 6651(b)(1) provides that the amount required to be shown (i.e., the deficiency amount where a return is not filed) is reduced by the amount of any credit (such as the credit for withheld taxes) against the tax which may be claimed. The pleadings show that there is no dispute that $5,356.40 of Federal income tax had been withheld from petitioner's wages. Therefore, the addition imposed by section 6651 is computed on the difference between408 the deficiency, $9,051.40, and the amount of tax withheld, $5,356.40, or $3,695.00. Harris v. Commissioner, 51. T.C. 980 (1969). Because petitioner did not file a return, he is subject to the maximum of 25 percent of this amount or $923.75 (25% X $3,695). In his answer, respondent requests that maximum damages of $500 be awarded under section 6673 because petitioner instituted these proceedings merely for delay. Under the circumstances in this case, we agree with respondent. Here petitioner has instituted these proceedings and has asserted as his defense to the Commissioner's determinations nothing but the frivolous contention that wages are not taxable income. Petitioners with genuine controversies have been delayed while we considered this case. Indeed, petitioner knew or should have known when he filed his petition that he had no reasonable expection of receiving a favorable decision. Arguments identical to those raised by the petitioner have been considered several times in the past and have been consistently rejected as being without merit. Based on the record in this case, we must conclude that the petitioner has instituted this proceeding merely for delay and409 that the maximum damages authorized by law ($500) are appropriate and will be awarded pursuant to section 6673. 5Decision will be entered for respondent.Footnotes1. Unless otherwise stated, all statutory references are to the Internal Revenue Code of 1954, as amended, and all rule references are to the Tax Court Rules of Practice and Procedures.↩2. Petitioner also complains that the amount withheld from his wages was not taken into consideration in computing the negligence addition. Amount of withholding, however, is not considered in computing the deficiency or the underpayment attributable to negligence. See sections 6653(c)(1) and 6211(b)(1)↩. It is taken into account in computing the 6651(a) addition as discussed infra.3. Printed at the bottom of the document is the phrase, "Copyright 1980, Eugene J. May." Mr. May was recently enjoined from marketing or distributing any "tax" forms which differ from the official Form 1040. United States v. May,555 F.Supp 1008↩ (E.D. Mich. 1983). 4. Although the petitioner reported some interest income, it alone was not sufficient in amount to result in a tax liability.↩5. We note that in cases commenced after December 31, 1982, the Court may impose damages up to $5,000 for proceedings instituted or maintained by the taxpayer primarily for delay or where the taxpayer's position in such proceedings is frivolous or groundless. See sec. 292(b), Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 574.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620944/	LAWRENCE W. FOGLE AND JOYCE A. FOGLE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFogle v. CommissionerDocket No. 9657-77.United States Tax CourtT.C. Memo 1978-200; 1978 Tax Ct. Memo LEXIS 316; 37 T.C.M. (CCH) 856; T.C.M. (RIA) 780200; May 31, 1978, Filed 316 Osmun R. Latrobe, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: This case was called for trial on April 24, 1978, at the session of the Court in Oklahoma City, Oklahoma. There was no appearance by the petitioners although they were sent a notice on January 19, 1978, setting the case for trial. They were further notified by an order dated February 17, 1978, that their motion to dismiss this case on constitutional grounds and respondent's motion for leave to file an amendment to his answer would also be heard on April 24, 1978. At the hearing on that date the Court granted respondent's motion for leave to file an amendment to his answer and denied the petitioners' motion to dismiss. Respondent then moved orally that this case be dismissed for failure to properly prosecute. Respondent determined a deficiency of $226 in petitioners' Federal income tax for the year 1975. The principal adjustments were based upon the failure of the petitioners to substantiate the deductibility and amount of claimed interest and child care expenses. Petitioners' arguments with respect to this case are set forth in their motion to dismiss. All of them lack317 merit. The assertion of the Fifth Amendment privilege was untimely, premature and without foundation. See Harper v. Commissioner,54 T.C. 1121">54 T.C. 1121, 1131-1139 (1970). Neither the petitioners nor the respondent have given the Court any reason to believe that a criminal investigation is presently underway or even a remote possibility. In Burns, Stix Friedman & Co. v. Commissioner,57 T.C. 392">57 T.C. 392 (1971), we held that this Court was properly created as an Article I court and that exercise of the jurisdiction conferred upon it by Congress does not violate Article III of the Constitution of the United States.In Rockwell v. Commissioner,512 F. 2d 882, 887 (9th Cir. 1975), affg. a Memorandum Opinion of this Court, the Court of Appeals rejected an argument that placing the burden of proof on petitioner was unconstitutional stating that the argument borders on the frivolous. See also Roberts v. Commissioner,62 T.C. 834">62 T.C. 834 (1974). We have also held in a number of cases that a taxpayer in this Court has no right to a jury trial. Cupp v. Commissioner,65 T.C. 68">65 T.C. 68, 86 (1975), affd. 559 F. 2d 1207 (3d Cir. 1977);*318 Swanson v. Commissioner,65 T.C. 1180">65 T.C. 1180 (1976). The deficiency determination is presumptively correct, and the petitioners have the burden of proving that it is erroneous. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142, Tax Court Rules of Practice and Procedure. Petitioners have offered no proof. We reject their argument that their Federal income tax return, signed under penalty of perjury, is presumptively correct. In Roberts v. Commissioner,supra, a case almost squarely in point on each issue present in the instant case, this Court found that no such presumption on behalf of petitioners exists. Accordingly, we will grant respondent's motion to dismiss this case for lack of prosecution. An appropriate order and decision will be entered.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620945/	T. Jack Foster, et al. 1 v. Commissioner.Foster v. CommissionerDocket Nos. 1004-64, 1005-64, 1025-64 - 1042-64, 1088-64.United States Tax CourtT.C. Memo 1966-273; 1966 Tax Ct. Memo LEXIS 10; 25 T.C.M. (CCH) 1390; T.C.M. (RIA) 66273; December 27, 1966Roy C. Lytle, 824 Commerce Exchange Bldg., Oklahoma City, Okla., for the petitioners, J. C. Linge, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in the income tax liability of Likins-Foster Honolulu Corporation and subsidiaries for the fiscal years ended June 30, 1957, June 30, 1958, and June 30, 1959, in the respective amounts of $109,603.60, $744,425.31, and $643,982.47, 14 and by amendment to answer claimed an increased deficiency for the fiscal year ended June 30, 1957, making a total deficiency claimed for that year of $161,082.09. 2Respondent determined deficiencies in income tax and addition to the tax under section 6651(a) of the Internal Revenue Code of 19543 for the taxable period February 11, 1958, through June 30, 1958, and a deficiency in income tax for the fiscal year15 ended June 30, 1959, of Likins-Foster Ord Corp., transferor, in the respective amounts of $155,326.33, $38,831.58, and $97,756.63, and further determined that Likins-Foster Honolulu Corporation, T. Jack Foster, T. Jack Foster, Jr., John R. Foster, and Richard H. Foster were each liable as a transferee of Likins-Foster Ord Corporation in the amount of $291,914.54. By amendments to answers, respondent claimed an increased deficiency in income tax for the fiscal year ended June 30, 1959, of Likins-Foster Ord Corp., transferor, in the amount of $18,049.87, bringing the total deficiency in income tax of the transferor claimed for this year to $115,806.50 and alleged that Likins-Foster Honolulu Corp., T. Jack Foster, T. Jack Foster, Jr., John R. Foster, and Richard H. Foster were each liable as a transferee of Likins-Foster Ord Corp. in the respective amounts of $309,964.41, $90,058.22, $10,006.47, $10,006.47, and $10,006.47. Respondent determined deficiencies in income tax and addition to the tax under section 6651(a) for the taxable period February 11, 1958, through June 30, 1958, and a deficiency16 in income tax for the fiscal year ended June 30, 1959, of Likins-Foster Monterey Corp., transferor, in the respective amounts of $138,052.06, $34,513.02, and $97,756.63, and further determined that Likins-Foster Honolulu Corporation, T. Jack Foster, T. Jack Foster, Jr., John R. Foster, and Richard H. Foster were each liable as a transferee of Likins-Foster Monterey Corporation in the amount of $270,321.71. By amendments to answers respondent alleged that the deficiency in income tax for the fiscal year ended June 30, 1959, of Likins-Foster Monterey Corp., transferor, should be decreased by the amount of $18,049.88, leaving a total deficiency in income tax of the transferor claimed for this year of $79,706.75 and alleged that Likins-Foster Honolulu Corp., T. Jack Foster, T. Jack Foster, Jr., John R. Foster and Richard H. Foster were each liable as a transferee of Likins-Foster Monterey Corp. in the respective amounts of $252,271.83, $91,707.59, $10,189.75, $10,189.75 and $10,189.75. Respondent determined a deficiency in income tax for the fiscal year ended June 30, 1959, of Likins-Foster Biggs Corp., transferor, in the amount of $42,250 and further determined that Likins-Foster Honolulu17 Corporation, T. Jack Foster, T. Jack Foster, Jr., John R. Foster and Richard H. Foster were each liable as a transferee of Likins-Foster Biggs Corp. in the amount of $42,250. By amendments to answer respondent claimed an increased deficiency in income tax for the fiscal year ended June 30, 1959 of Likins-Foster Biggs Corp., transferor, in the amount of $625 bringing the total deficiency in income tax of the transferor claimed for this year to $42,875 and alleged that Likins-Foster Honolulu Corp., T. Jack Foster, T. Jack Foster, Jr., John R. Foster and Richard H. Foster were each liable as a transferee of Likins-Foster Biggs Corp., in the respective amounts of $42,875, $42,875, $15,057.58, $15,057.59 and $15,057.58. Respondent determined a deficiency in income tax for the fiscal year ended June 30, 1959, of Likins-Foster El Paso Corp., transferor, in the amount of $42,250 and further determined that Likins-Foster Honolulu Corporation, T. Jack Foster, T. Jack Foster, Jr., John R. Foster and Richard H. Foster were each liable as a transferee of Likins-Foster El Paso Corp., in the amount of $42,250. By amendments to answers respondent claimed a decreased deficiency in income tax for18 the fiscal year ended June 30, 1959, of Likins-Foster El Paso Corp., transferor, in the amount of $625 bringing the total deficiency in income tax of the transferor claimed for this year to $41,625 and alleged that Likins-Foster Honolulu Corp., T. Jack Foster, T. Jack Foster, Jr., John R. Foster, and Richard H. Foster were each liable as a transferee of Likins-Foster El Paso Corp. in the respective amounts of $41,625, $41,625, $14,529.38, $14,529.38, and $14,529.38. Some of the issues raised by the pleadings have been disposed of by the parties, each party having made certain concessions at the trial or on brief. The issues left for our decision are the following: (1) Whether the net operating loss deduction claimed by Likins-Foster Honolulu Corp. and subsidiaries on their consolidated corporate tax return for the fiscal year ended June 30, 1957, should be reduced by $639,488.61 or any portion thereof. The reduction of $639,488.61 in the claimed net operating loss is composed of several items so that resolution of this issue is dependent upon the decision reached as to the following questions: (a) Whether the gains upon the sale of 421 houses to persons unrelated to any of the19 corporations in the Likins-Foster Honolulu Corp. consolidated group were properly reallocated by respondent under the provisions of section 482 from the affiliates reporting the gains to another affiliate which had originally owned the houses but had purportedly made a transfer of the houses to the affiliates reporting the gains. If respondent properly reallocated the gains realized on the sale of these houses, then the separate income for the fiscal year ended June 30, 1957, of each of the affiliates which reported these gains would be reduced by the amounts of such gains reported and certain loss carryovers incurred by the affiliates prior to the time they became members of the consolidated group would not be usable, thereby reducing the total net operating loss available to the consolidated group for the fiscal year ended June 30, 1957, by $388,891.28. If the gains were not properly reallocated, did they constitute ordinary income to the affiliates reporting them? (b) What is the proper method to be used in the application of net operating loss carryovers of affiliates from years for which those affiliates filed separate returns to years in which the affiliates were members of20 the group filing a consolidated return? 4(c) Whether the income of Likins-Foster Honolulu Corp. for the taxable year ended June 30, 1956, should be increased by the amount of $153,671 distributed to it in cash from two of its subsidiaries so that the loss carryover to the fiscal year ended June 30, 1957, should properly be decreased by this amount. The correctness of the increase in the income of Likins-Foster Honolulu Corp. requires a determination of whether cash distributions to it by two of its subsidiaries were dividends or were distributions which reduced the parent's basis in the stock of its subsidiaries with the excess received over its basis in the stock constituting taxable income to the parent. (2) Whether Likins-Foster Honolulu Corp. realized gains during its fiscal year ended21 June 30, 1957, from payments made to it by two of its subsidiaries for redemption of stock of those two subsidiaries. One of the two subsidiaries was one that had made distributions to the parent corporation in 1956 which respondent had determined to result in taxable income to the parent in that year and therefore the determination of whether the distributions in 1956 reduced the parent's basis in the subsidiaries' stock affects the amount above basis which the parent received upon redemption. The other subsidiary had made a distribution to the parent in 1956 which respondent determined reduced the basis of the parent in its stock although respondent made no determination that income resulted in the fiscal year 1956 from this distribution since the reduction in basis of the stock was less than the parent's basis in the stock. The amount of the parent's basis in the stock redeemed is also affected by whether an adjustment is required for losses of these subsidiaries availed of in consolidated returns which could not have been used if a separate return had been filed by that subsidiary. (3) Whether Likins-Foster Honolulu Corp. and subsidiaries are entitled to deductions in computing22 the consolidated corporate income for; (a) The amount of $2,700 paid by two of the subsidiaries for legal services in connection with the redemption by these subsidiaries of certain of their stock during the fiscal year ended June 30, 1957. (b) The amount of $17,500 paid by the partnership T. Jack Foster and Sons, during the fiscal year ended June 30, 1958, to a law firm for services rendered on behalf of all the Foster Companies in 1956 and charged by the partnership of T. Jack Foster and Sons, to Likins-Foster Honolulu Corp. and subsidiaries. (c) The amount of $500 of $1,944 paid by T. Jack Foster and Sons, a partnership, to a New York City attorney for an opinion with respect to how four of the subsidiaries of Likins-Foster Honolulu Corp. should proceed in condemnation negotiations with the United States, and allocated by the partnership to the four corporations whose properties were threatened with condemnation and a $5,000 legal fee and $9,000 of appraisal fees paid by the corporations whose properties were condemned in connection with the condemnation proceedings. (4) Whether certain items paid by one of the subsidiaries of Likins-Foster Honolulu Corp. in connection with23 the acquisition from an unrelated party of certain properties were deductible in the fiscal year ended June 30, 1957, during which they were paid, or constituted a portion of the capital invested in the project and should therefore be used to increase the cost of the properties and the basis of the properties when they were subsequently sold. (5) Whether certain portions of deductions claimed by Likins-Foster Honolulu Corp. and its subsidiaries as travel and entertainment expenses during the fiscal years ended June 30, 1958 and June 30, 1959, were properly disallowed by respondent. (6)(a) Whether the consolidated income of Likins-Foster Honolulu Corp. and its subsidiaries for the fiscal year ended June 30, 1958, should be increased because of gains being realized by four of these subsidiaries upon condemnation in the latter part of 1957 of their properties by the United States Government, their bases in these properties at the date of the declaration of taking by the United States being less than the principal due on the mortgages outstanding thereon. In the alternative, if gain was not realized at the date of taking, whether these subsidiaries realized income because of the execution24 of agreements by the United States Department of Defense, the mortgagees and the Federal Housing Administration which made provisions with respect to payment of the mortgages on the properties of the subsidiaries which had been condemned by the United States. The four subsidiaries ceased to be affiliates of Likins-Foster Honolulu Corp. as of February 10, 1958. (b) Whether the four subsidiary corporations whose properties were condemned by the United States realized a taxable gain during their fiscal years ended June 30, 1959, when they withdrew amounts which had been deposited by the United States with the District Courts at the time of the filing of the declaration of taking and at the time of the filing of an amended declaration of taking. (c) If the four subsidiaries did realize a gain upon the withdrawal of the deposits from the escrow account, was this gain with respect to property sold within a year after the adoption of a plan of complete liquidation and therefore not subject to tax under the provisions of section 337? (7) Whether respondent properly disallowed deductions for finance fees, interest, administrative and other corporate expense claimed by Likins-Foster Honolulu25 Corp. and subsidiaries for the fiscal year ended June 30, 1959, in the amount of $325,000 because of petitioners' failure to show that the expenditures constituted ordinary and necessary business expenses. (8) Whether Likins-Foster Honolulu Corp. had a gain during its fiscal year ended June 30, 1959, because of the transfer to it of the amount withdrawn from the deposits made by the United States in connection with the declaration of taking of property on condemnation of four of its subsidiary corporations because of the amounts withdrawn being turned over to it by the subsidiary corporation by which it was withdrawn as a distribution in liquidation. (9) The transferees admit that they are liable as transferees and do not appear to contest the amount of that liability as ultimately alleged by respondent in his amendments to answers, but since this is not unmistakably clear we will include a finding as to the extent of the value of the assets transferred to each transferee as shown by the evidence. Findings of Fact Some of the facts have been stipulated and are found accordingly. Likins-Foster Honolulu Corp. (hereinafter referred to as Honolulu) and all the other corporations26 involved in these cases, except Cochiti Pumice Company, which is incorporated under the laws of New Mexico, and Central Development Co., Ltd., which is incorporated under the laws of Hawaii, are corporations organized and existing under the laws of Delaware. During all the years here involved all of these corporations maintained their books and records in the State of Oklahoma and filed their Federal income tax returns with the district director of internal revenue at Oklahoma City. T. Jack Foster (hereinafter referred to as Foster) and Gladys Foster are husband and wife. T. Jack Foster, Jr., John R. Foster, and Richard H. Foster are sons of T. Jack Foster and Gladys Foster. Foster's sons will hereinafter be referred to by their first names. Foster and each of his sons kept their books and records and filed their Federal income tax returns during all the years here material with the district director of internal revenue at Oklahoma City. There is no issue involved in this case with respect to the individual tax liability of Foster or any one of his sons. They are involved in this case because of respondent's determination that they are liable as transferees of Likins-Foster Ord27 Corp. (hereinafter referred to as Ord), Likins-Foster Monterey Corp. (hereinafter referred to as Monterey), Likins-Foster Biggs Corp. (hereinafter referred to as Biggs), and Likins-Foster El Paso Corp. (hereinafter referred to as El Paso). For the fiscal years ended June 30, 1954, 1955, 1956, 1957, 1958 and 1959 Honolulu and subsidiaries filed consolidated Federal income tax returns. Ord, Monterey, Biggs and El Paso became ineligible to file consolidated returns with Honolulu as of February 10, 1958, because Honolulu ceased as of that date to own 80 percent or more of the stock of those corporations. On or about October 5, 1959, each of those corporations filed a separate corporate Federal income tax return for the taxable period February 11, 1958 to June 30, 1958, and for the fiscal year ended June 30, 1959 with the district director of internal revenue at Oklahoma City. The subsidiary corporations that filed consolidated Federal income tax returns with Honolulu and the years for which the income of each was included in the consolidated returns are as follows: Taxable years for which such cor-poration filed a consolidatedName of corporationreturn with HonoluluAliamanu Homes, Ltd.6-30-54 through 6-30-59Likins-Foster Ord Corp.6-30-54 through 2-10-58Likins-Foster Monterey Corp.6-30-54 through 2-10-58Likins-Foster Biggs Corp.6-30-54 through 2-10-58Likins-Foster El Paso Corp.6-30-54 through 2-10-58Likins-Foster Olathe Corp.6-30-55 through 6-30-59Likins-Foster Topeka Corp.6-30-54 through 6-30-59Likins-Foster Salina Corp.6-30-54 through 6-30-59Cochiti Pumice Company6-30-55 through 6-30-59Lomita Homes, Inc.6-30-54 through 6-30-59Cardiff Homes, Inc.6-30-54 through 6-30-59Highland Park Homes, Inc.6-30-54 through 6-30-59Biggs Rental Co.6-30-57 through 6-30-59Foster Homes, Ltd.6-30-57 through 6-30-59Foster Development Corp.6-30-57 through 6-30-59Central Development Co., Ltd.6-30-58 through 6-30-5928 From and after February 10, 1958, all of the capital stock outstanding and issued by Ord, Monterey, Biggs, and El Paso was owned as follows: PercentNumber ofof stockShareholdersharesownedLikins-Foster HonoluluCorp.11979 1/3T. Jack Foster23 1/415 1/2T. Jack Foster, Jr.2 7/121 13/18John R. Foster2 7/121 13/18Richard H. Foster2 7/121 13/18Foster is the president or chairman of the board of Honolulu and of each of its subsidiaries or affiliates. The corporations were organized in the period from 1950 to 1953 and all but one have been continuously engaged in the business of developing land, building dwellings, and renting or selling them. The one exception was Cochiti Pumice Co. which for a time was engaged in the development of pumice deposits in New Mexico. Foster was initially connected in his various business enterprises with an individual named Likins. About 1955 Likins retired and his interests in the various enterprises were purchased by Honolulu and Foster's sons. Likins and Foster had operated a partnership which performed services for their corporations. After Likins' retirement, Foster and his sons formed29 a similar partnership under the name "T. Jack Foster & Sons." All of the building and development was done by the corporations. Some of the developments carried out by the corporations were known variously as Wherry projects, 903 projects, 203 projects, and 213 projects. The numerals refer to sections of the Federal housing acts under which Federal financing for the projects was obtained. "Wherry project" refers to a project built in accordance with provisions of the Federal Military Housing Act (hereinafter sometimes referred to as the Wherry Act). Under this act a developer obtained a long-term lease of land from the Department of Defense for nominal rent for the purpose of constructing dwellings for rental to military personnel. The FHA guaranteed the loans obtained to construct the houses in Wherry projects, as well as those obtained in connection with nonmilitary projects. Each project was owned by a separate corporation primarily because of FHA or Wherry Act restrictions on the size of a mortgage which would be guaranteed for one corporation or the number of dwellings which one mortgage could cover. It was because of these restrictions that Ord and Monterey each built and leased30 a portion of the houses in a large project at Fort Ord, California, and El Paso and Biggs each built and leased a portion of the houses in the project at Biggs Air Force Base, Texas. Reallocation of Gains on Sales of Houses Issue 1(a) Likins-Foster Topeka Corp. (hereinafter referred to as Topeka) constructed and owned 421 houses and duplexes (486 units) in Topeka, Kansas, which were rented by it to personnel of Forbes Air Force Base from the time of completion until about July 1, 1956, at which date all of those properties were transferred to Ord, Monterey, Biggs, and El Paso (referred to collectively as the Wherry corporations) each grantee receiving by deeds certain definite lots. It had been decided that Topeka should dispose of this property because the area was about to be taken within the city limits of Topeka, Kansas, which would cause an increase in taxes, and also because a new, large housing project was going to be built for the use of Forbes Air Force Base personnel. It was decided that Topeka would transfer this property to four of its affiliated corporations before ultimate sale to outside parties. Topeka was liable on the mortgages on these properties to31 the FHA by which the project had been initially financed. The FHA had previously assigned the mortgages on these properties to the Federal National Mortgage Association (hereinafter referred to as FNMA). Topeka transferred the houses subject to the mortgages to the Wherry corporations, but the transferees did not assume the mortgages. The books and records of Topeka show a sale price of the 421 houses and duplexes in an amount which exceeded its cost basis by $882,967.39. After the transfer Topeka owned no rental properties. The consolidated blance sheet for the year ended June 30, 1957, shows that Topeka had an asset entitled, "accounts receivable - intercompany-$736,816," and total assets of $774,097. This balance sheet shows no mortgage liability of Topeka and shows a "separate earned deficit - $88,290" and a "consolidated earned surplus - $628,639." After the transfer by Topeka of the 421 houses to the Wherry corporations there was no significant change in the operations carried on in Topeka, Kansas, with respect to the properties transferred. There had been a small office staff of two or three people located in Topeka who handled the rentals and looked after upkeep of these properties. 32 After the transfer of the houses to the Wherry corporations, one or two persons, including one of Foster's sons, were added to the office force in Topeka to handle the individual sales of the houses. During the fiscal year ended June 30, 1957, Ord, Monterey, Biggs, and El Paso sold, by contracts of sale, all of the houses and lots. A typical contract of sale entered into between a Wherry corporation and the purchaser of one of the houses provided that the property was sold subject to the FHA mortgage, that payments of the purchase price would consist of (1) monthly payments with respect to the FHA mortgage of principal and interest, insurance, taxes and mortgage insurance, and (2) initial payment and monthly payment of principal and interest to the seller on the amount of the sales price in excess of the amount remaining due on the FHA mortgage. The seller agreed to convey title to the purchaser upon payment in full of the amount due to the seller. The sales were completed in June 1957. The books and records of the several corporations disclose that on June 29, 1957, Ord, Monterey, Biggs, and El Paso transferred and assigned the balances due on the contracts of sale acquired33 by them in connection with the sale of the 421 housing units to Honolulu as dividends, and in the case of Biggs, partially by the assumption by Honolulu of certain liabilities of Biggs to other members of the consolidated group. The transaction was treated by Topeka on its books and records as an intercompany transaction and no part of the gain at which it transferred the properties was reported as taxable income on the consolidated return filed for the year ended June 30, 1957. Topeka reported a loss of $63,439 for consolidated purposes that year which was determined as follows: Topeka reported a gross income of $928,844, which included $1,221,743 from "sale of houses and lots" plus amounts of income from other sources, less $299,945, "cost of houses and lots sold." Topeka reported expense deductions of $109,316, leaving a net income of $819,528. An amount of $882,967 was eliminated as "intercompany sales," leaving a loss of $63,439. The books and records of the Wherry corporations disclose that the properties transferred to them from Topeka sold for an amount of $387,654 in excess of the amount paid therefor to Topeka. The Wherry corporations reported the sales as installment34 sales on the consolidated return for the year ended June 30, 1957, as follows: Taxablegain forfiscalUnits soldProfityearOrd106 houses40 duplexes$ 440,196$ 95,314Monterey91 houses300,003142,455Biggs94 houses274,965110,098El Paso80 houses255,458124,974411 buildings $1,270,622$472,841The amount, $472,841, shown above, represents down payments received at the time of sale, plus collections made on the contracts of sale during the fiscal year ended June 30, 1957. The Wherry corporations reported gross and net taxable income for the fiscal year ended June 30, 1957, as follows: Gross in-Deduc-Net in-cometionscomeOrd$668,193$582,441$ 85,753Monterey639,271553,17886,093Biggs521,748415,404106,344El Paso527,934413,354114,580As of June 30, 1956, the Wherry corporations each had net operating loss carryovers from years for which each had filed a separate return. The following35 schedule shows the part of such carryovers which is attributable to the taxable year ended December 31, 1952, the total carryover available to each of the Wherry corporations for the fiscal year ended June 30, 1957, and the excess (deficiency) of such total carryover over (below) the net income reported by each of the corporations for the fiscal year ended June 30, 1957. Total separateExcess (deficiency) overLoss attribu-net operat-income shown for fis-table toing losscal year ended1952carryoverJune 30, 1957Ord$30,889$ 81,875($ 3,878)Monterey10,711123,13937,046Biggs49,681106,41874El Paso58,187114,945365 Topeka had no net operating loss carryover from its separate return years at June 30, 1956. The consolidated group reported aggregated taxable income of $218,862 for the year ended June 30, 1957, and claimed a net operating loss deduction of $870,461, which was applied as hereinafter set forth, leaving no consolidated taxable income and a consolidated net operating loss carryover to subsequent years. The net operating loss deduction figure was composed of separate net operating loss carryovers totaling36 $535,747 and a consolidated net operating loss carryover of $334,714. In his notice of deficiency, respondent reallocated the reported installment gain of $472,841 to Topeka. This reallocation, together with certain minor adjustments, resulted in separate taxable incomes and (losses) for Topeka and the Wherry corporations as follows: Topeka$409,401.40Ord(4,069.39)Monterey(49,569.67)Biggs(1,647.27)El Paso(8,286.53) Proper Method to Be Used in the Application of Separate Net Operating Loss Carryovers Issue 1(b) As of June 30, 1956, Ord, Monterey, Biggs, and El Paso had total net operating loss carryovers available for use in the fiscal year ended June 30, 1957, from years for which separate returns had been filed as set forth in our findings under issue 1(a). The following table shows the year-end dates on which certain other subsidiaries of Honolulu first joined in filing consolidated returns and the separate loss carryover of each remaining for use in consolidated returns filed for the year ended June 30, 1957, and subsequent years. Loss carryoverDate of first con-at date ofSeparate losssolidated re-affilia-carryover atSubsidiaryturntionJune 30, 1956Aliamanu Homes LimitedJune 30, 1954$82,144.580Likins-Foster Olathe Corp.June 30, 195538,545.16$38,545.16TopekaJune 30, 195487,175.000Likins-Foster Salina Corp.June 30, 195439,851.3539,851.35Cardiff Homes, Inc.June 30, 195434,689.470Cochiti Pumice Co.June 30, 195538,764.070Biggs Rental Co.June 30, 195717,666.4517,666.45 Foster Homes, Ltd.June 30, 19571,152.781,152.7837 Honolulu had no separate loss carryover to June 30, 1954, the close of the first year for which the group filed a consolidated return, nor at June 30, 1956, the end of the year preceding the first year here in issue. Foster Development Corp. and Central Development Co., Ltd., which filed their tax returns with the consolidated group for the first time for the years ended June 30, 1957, and June 30, 1958, respectively, are not shown to have any separate loss carryovers as of the date their incomes or losses were first included in the consolidated return. Lomita Homes, Inc. (hereinafter referred to as Lomita) and Highland Park Homes, Inc. (hereinafter referred to as Highland Park) each of which joined in filing a consolidated return with Honolulu and subsidiaries for the fiscal year ended June 30, 1954, had separate net operating loss carryovers for their fiscal years ended March 31, 1954, available for use in subsequent years in the respective amounts of $66,899.32 and $13,559.22. Petitioners in computing taxable consolidated net income would apply the separate38 loss carryover of a particular subsidiary to the separate income of that subsidiary as shown prior to determining the consolidated net income or loss. The result of the use of this method was to increase the amount of the consolidated loss carryover available for use in subsequent years over what it would have been if no separate losses had been used for years in which the consolidated group sustained a consolidated loss prior to applying the net operating loss carryover, or the amount of the separate losses used had been limited to a portion of the separate net income in those years where there was a consolidated net income composed of separate incomes of some subsidiaries and separate losses of other subsidiaries prior to applying a net operating loss carryover. Respondent determined that no separate net operating loss carryover should be used to reduce separate net income for those years in which there was a consolidated net loss prior to application of any net operating loss carryover. As of June 30, 1956, the parties differ with respect to the separate net operating loss carryovers of the following corporations, each party showing the separate loss carryovers as of that date39 in the amount indicated: Amount of separate net losscarryover as of June 30,1956, available to becarried to a sub-sequent yearor yearsRespondent'sPetitioners'Name of sub-determina-computa-sidiarytiontionLomita$ 6,956.19NoneHighland Park13,559.22$12,154.82In 1954 and 1955, the group had combined net losses before deduction of a net operating loss carryover of $224,615.30 and $245,204.10, respectively. Lomita deducted its separate net operating loss carryover from its separate net income of $20,916.36 in the fiscal year ended June 30, 1955, and absorbed the remainder of its separate net operating loss carryover by deducting it from its separate net income for the fiscal year ended June 30, 1956, and Highland Park deducted a portion of its separate net operating loss carryover from its separate net income of $1,404.40 for the fiscal year ended June 30, 1954. Respondent determined that no portion of the separate net operating loss carryover of Lomita and Highland Park could be used for the fiscal years ended June 30, 1954, and 1955 in which the combined incomes or losses of the entire group resulted40 in a combined net loss, and that the remaining carryover of Lomita was not totally absorbed at June 30, 1956. In the fiscal year ended June 30, 1957, ten of the affiliates reported separate net incomes which totaled $660,273. Six of the affiliates reported separate net losses, which totaled $441,411.24. The combined net incomes and losses as reported by the affiliated group was an income of $218,861.76, which figure was shown on the consolidated income tax return as consolidated net income before deduction of any net operating loss. On petitioners' consolidated return, net operating losses were not applied against the consolidated net income of the affiliates as shown on the face of the return, but the separate net operating loss carryovers of affiliates having separate net incomes for the fiscal year ended June 30, 1957, were applied against the total separate incomes of such affiliates. By this method separate net operating losses totaling $447,181.50 were absorbed as shown in the following table. SeparateNetcarryoverCorporationincomeusedAliamanu Homes, Lim-ited$119,788.30NoneOrd85,752.61$ 81,874.70Monterey86,092.5886,092.58 Biggs Rental Co.106,343.88106,343.88 El Paso114,580.12114,580.12 Salina39,362.8439,362.84 Cochiti Pumice Co.4,145.97Highland Park1,260.931,260.93 Biggs Rental Co.20,408.6717,666.45Honolulu82,537.10NoneTotal$660,273.00$447,181.5041 The following table shows a summary of the method used by petitioners in applying net operating loss carryovers in their consolidated return for the fiscal year ended June 30, 1957. Total income of the 10 affiliatesshowing separate gain$660,273.00Separate carryovers used to offsetthese separate gains447,181.50Unabsorbed separate gains$213,091.50Total current operating losses of 6affiliates reporting separate losses(441,411.24)Unabsorbed current losses($228,319.74)The unabsorbed current loss of $228,319.74 was considered by the affiliated group to be a consolidated loss for the fiscal year 1957, and it was added to consolidated loss carryovers from previous years to make up the consolidated loss carryover to the fiscal year 1958. The consolidated group employed the same method in the tax returns filed for the fiscal years ended June 30, 1958 and 1959 with the following results: 19581959Total income of affili-ates reporting sepa-rate gain$169,663.68$594,375.66Separate carryoversused to offset theseseparate gains4,971.692,386.08Unabsorbed separategains$164,691.99$591,989.58Total current operatinglosses of affiliates re-porting losses(161,539.29)(40,180.19)Excess of unabsorbedincome over losses$ 3,152.70$551,809.3942 In 1958 and 1959, there being no "consolidated loss" resulting from the application of the first two steps as described for the fiscal year 1957, the excess gain figures were reduced to zero by application of consolidated carryovers of $563,033.63 and $559,880.93, respectively, resulting in no taxable consolidated net income. Respondent attached to his notice of deficiency a lengthy schedule showing his computation of the portion of the separate losses available for use by each subsidiary which had separate income in the fiscal years ended June 30, 1957, 1958, and 1959, which, on brief, respondent says is a result of applying the following formula: (Subsidiary's separate loss carryover included in the consolidated net operating loss deduction) divided by (The total separate loss carryovers included in the consolidated net operating loss deduction) times (The consolidated taxable income for the year before deduction of the consolidated net operating loss deduction). Inclusion in Income of Parent Corporation of Capital Distributions or Redemptions of Stock by Ord, Monterey and Highland Park. Issues 1(c) and 2 As of June 30, 1955, Honolulu owned all of the outstanding43 stock of Ord, Monterey and Highland Park. The number of shares outstanding and Honolulu's bases in the voting (class A) stock were as follows: VotingNonvoting(Class A)(Class B)No. ofNo. ofSharesBasisSharesOrd850$ 85,000100Monterey2,150215,000100Highland Park10017,3071,000 In accordance with an FHA requirement, each of the Wherry corporations had two classes of capital stock, class A and class B. Class A stock represented the capital required for the period beginning with construction and ending after the projects were fully constructed and class B stock represented working capital. Class A stock was callable only with approval of the FHA. Such approval was obtained with respect to the class A stock of Ord and Monterey prior to the date of the redemption by these corporations of their class A stock during the fiscal year ended June 30, 1957. During the fiscal year ended June 30, 1956, Ord and Highland Park distributed in cash to Honolulu the amounts of $238,500 and $17,478, respectively. Monterey distributed $36,000 in cash to Honolulu during that same year. For the fiscal years ended June 30, 1955 and 1956, 44 Ord, Monterey and Highland Park showed deficits in their separate earned surplus accounts contained on the balance sheets filed with the consolidated income tax returns as follows: OrdMontereyHighland ParkYearYearYearYearYearYearEndedEndedEndedEndedEndedEnded6/30/556/30/566/30/556/30/566/30/556/30/56Separate earned$119,188$119,188$123,139$123,139$13,559$13,559deficitConsolidated$ 40,022$303,751$104,837$209,739$ 8,895$26,415earned deficitThe separate income or (loss) reported by Ord, Monterey and Highland Park and the consolidated income or (loss) reported in the consolidated returns filed for the years ending June 30, 1954, 1955 and 1956 were as follows: Year EndedHighlandJune 30OrdMontereyParkConsolidated1954($ 8,794)($23,877)$ 1,404($224,615)1955($27,446)($77,656) ($10,299)($245,204)1956($28,980)($72,090)($ 42)$449,800During the fiscal year ended June 30, 1957, Ord redeemed its 850 shares of class A, common stock held by45 Honolulu and Monterey redeemed its 2,150 shares of class A, common stock held by Honolulu paying Honolulu $70,000 and $200,000, respectively, in redemption. Ord and Monterey continued in active business after the redemption until on or about November 1, 1957, at which time their principal properties were condemned by the United States of America. For the fiscal year ended June 30, 1956, Honolulu reported taxable income of $1,024,421.12 on the consolidated return and reduced this figure by $887,527 denominated "intercompany dividends". Respondent determined that Honolulu realized additional taxable gain in the fiscal year ended June 30, 1956, of $153,671, which was the excess of the amount of cash it received from Ord and Highland Park in 1956 over Honolulu's bases in the stocks of those two corporations, and that the net operating loss carryover available at June 30, 1957, should be reduced accordingly. Respondent determined that Honolulu received longterm capital gain in the fiscal year ended June 30, 1957 on the redemption of the Ord and Monterey stock, and that, in computing such gain, Honolulu's basis in the Ord and Monterey stock should be reduced by the amounts of prior distributions46 which were not dividends. In an amendment to his answer respondent alleged that the basis of Honolulu in the stock of Monterey should be reduced by the amounts of losses which were sustained during the years Monterey filed consolidated returns with Honolulu to the extent that such losses were availed of beyond the degree to which Monterey could have used those losses if it had filed separate returns for the respective years. The amount of losses so availed of as alleged by respondent were $95,330.54. Claimed Deductions for Legal Fees and Appraisal Fees Issue 3 (a) During the fiscal year ended June 30, 1957, Ord paid $700 and Monterey paid $2,000 as legal fees to a law firm in Washington, D.C. which represented them before the FHA in connection with the obtaining of permission to redeem stock. The same firm had been hired on previous occasions by various of the Foster interests for similar legal services. The $2,700 was deducted as business expense in the computation of the consolidated income of Honolulu and subsidiaries for the fiscal year ended June 30, 1957. Respondent determined in his notice of deficiency that the amounts paid for legal services in connection with the stock47 redemptions should be added to the cost of the treasury stock acquired by the redeeming corporation. (b) In the taxable year ended June 30, 1958, payments were made by the partnership, T. Jack Foster & Sons, to Lytle, Johnston & Soule in the amount of $20,000, to Lewis Orgel in the amount of $1,944, and to Sincerbeaux & Shrewsbury in the amount of $5,000, all for legal services rendered. T. Jack Foster & Sons paid Lytle, Johnston & Soule the $20,000 in May 1958, in response to a bill "To fee for services rendered to all Foster Companies for the year 1956." The bill, dated May 21, 1958 was submitted by letter dated May 20, 1958. The partnership allocated $17,500 of the amount of this legal fee to Honolulu and its subsidiaries. This law firm had been counsel to the Foster organizations since 1950. Roy C. Lytle who represented petitioners at the trial of the instant case was one of the partners in this law firm. The fee paid in 1958 with respect to services performed in 1956 did not relate to the condemnations of the Fort Ord and Biggs Air Force Base projects. (c) T. Jack Foster & Sons paid Lewis Orgel, a New York City attorney, $947 on February 19, 1958, $947 on March 5, 1958 and48 $50 on March 15, 1958, a total of $1,944. Foster considers Lewis Orgel to be an expert on condemnation law. After learning that the United States might proceed to condemn all projects built under the Wherry Act, interested project owners met in Washington and arranged for the services of Orgel to prepare an opinion on the procedure to be followed in condemnation negotiations. His fee was $1 per unit in each project and the amount paid by each of the Wherry corporations which were Honolulu's subsidiaries was allocated in that manner. Respondent in his notice of deficiency disallowed as a deduction for a business expense $500 of the payment to Lewis Orgel. The notice does not state whether this amount represented a partial disallowance of the fees allocated to each of the Wherry corporations or a total disallowance as to one of those corporations. In 1958 Monterey paid Sincerbeaux & Shrewsbury a legal fee of $5,000. This firm was counsel to Greenwich Savings Bank, the assignee under the mortgage on the Monterey project. Greenwich Savings Bank filed a cross-claim for attorneys' fees of $15,000 in the Monterey-Ord condemnation proceedings. The $5,000 was paid as a compromise settlement49 of that claim. Respondent disallowed the deduction of the $5,000 as a business expense. T. Jack Foster & Sons paid Leonard J. Cowley $1,000 on December 6, 1957 and Biggs paid him $3,000 on February 14, 1958. Biggs also paid Marshall and Stevens $5,000 on February 14, 1958. All of these payees are professional real estate appraisers. Respondent disallowed as a deduction for a business expense the $9,000 paid to these real estate appraisers. Respondent allowed as selling expenses, in computing gain on the payments in condemnation of the Wherry projects, the $500 disallowed of the amount paid to Lewis Orgel, the $5,000 paid Sincerbeaux & Shrewsbury and the $9,000 paid to the real estate appraisers. Expenses in Connection with the Acquisition of the San Jose Project Issue 4 On June 23, 1955, T. Jack Foster & Sons, the partnership, (hereinafter sometimes referred to as Foster & Sons or Foster partnership), agreed to guarantee a bank loan of $2,100,000 which was to be obtained from Central Valley Bank by California Development Co. (hereinafter referred to as California Development), a partnership of four individuals which had no connection with Honolulu or any of its subsidiaries, 50 for the purpose of acquiring and developing land near San Jose, California. Foster & Sons was to receive as consideration $500 for each house and lot sold by California Development plus $150 per house from "water refunds." California Development defaulted on the bank loan. The "default" of California Development was precipitated by Foster's discovery of bad faith dealings on the part of California Development, such as bloating the book cost of assets by transferral through straw parties. Foster threatened to have the bank foreclose on the loan if California Development continued with the project. California Development, on July 26, 1956, transferred all interest in the San Jose property to Foster, who transferred it to Lomita. Foster and Lomita each assumed the liabilities of California Development with the transfer of the assets. Lomita gave its note to the bank to cover the indebtedness of California Development, which at the time was $536,221.97, including interest of $66,257.30 charged on August 1, 1955 and interest of $14,687.32 charged on June 13, 1956. California Development had obtained FHA and FNMA commitments on the project for which a fee was charged which would have51 permitted the borrower to draw a stated amount as the project progressed. The full amount of the loan had not been drawn by the borrower when Lomita acquired the assets. The portion of the commitment or loan application fee applicable to this unused amount was $38,215.80. Since the entire commitment fee had been deducted from the loan when it was made, the loan assumed by Lomita included the $38,215.80 portion of the commitment fee applicable to the undrawn portion of the loan. The officers of Lomita decided that the existing development plan was not a good one and scrapped the plan. Because of this change of plans Lomita received no benefit from the portion of the commitment fee applicable to the unused portion of the loan. Lomita incurred an expense of $1,650.62 in the fiscal year ended June 30, 1957, for engineering fees and related costs in connection with the new plans which were drawn up after the original ones were scrapped. Petitioners claimed a deduction of $120,811.04 as "interest expense" of Lomita in the fiscal year ended June 30, 1957, composed of the following amounts: Administration and miscellaneousSan Jose operations$ 66,257.30Administration and interest San Joseoperations14,687.32FHA and FNMA commitment fees38,215.80Other costs of project1,650.62$120,811.0452 Respondent disallowed the deduction and determined that the $120,811.04 should be allocated to the basis of the units in the San Jose project and allowed additional cost-of-sale deductions in each of the years here involved because of this adjustment in the following amounts for the years indicated: Year endedAdditionalJune 30cost of sale1957$ 2,793.32195853,771.41195948,883.10$105,447.83Deductions for Travel and Entertainment Expenses Issue 5 The various Foster organizations operated over a wide georgraphic area, with projects in Kansas, Texas, California, Hawaii, and other widely distant locations. Travel expenses for officers and employees of the various corporations were incurred in each year here in issue in carrying on the affairs of the various corporations. When the United States began condemnation proceedings against the Fort Ord and Biggs Air Force Base projects, Foster went with certain of his employees to Fort Ord and Biggs Air Force Base to inventory items of personal property (such as water heaters and refrigerators) which were kept at the location of those projects for replacement and to repair those items in the various53 units of the project, which were in present need of repair. The personal property was part of the property under condemnation. Foster carried cash on these occasions and paid in cash for repair parts needed for repair work but not contained in the inventory at the project location, because local dealers would not extend credit to the Wherry corporations in light of the pending condemnations. At the same time, inspection of all housing units was made jointly by a Foster employee and a Government employee, to determine the general condition of each unit involved in the condemnation negotiations. Because of the work done in this respect by Foster and his employees the condemnation award was from $25,000 to $30,000 higher than it would otherwise have been. Employees who traveled for the Foster corporations were usually reimbursed by the Foster partnership. During the years 1956 through 1959 the Foster partnership expended the following amounts for travel and entertainment and allocated the indicated part of the amounts so expended to Honolulu: CalendarPaid by T.Charged toClaimed byyear endedJack FosterLikins-FosterT. JackDecember 31 & SonsHonolulu Corp.Foster & Sons1956$ 5,749.86None$ 5,749.86195722,854.20$20,082.892,771.31195820,301.5010,000.0010,301.50195915,981.78None15,981.7854 Respondent in his notice of deficiency disallowed deductions totaling $8,444 in the fiscal year of Honolulu and subsidiaries ended June 30, 1958, as follows: Honolulu$4,344Ord800Monterey800Biggs1,300El Paso1,200 Of the total of $4,100 deductions claimed by the Wherry corporations disallowed by respondent, he allocated $1,500 as expenses of sale in computing the gain to Biggs and El Paso on the condemnation of the El Paso-Biggs project, increasing the basis of the project by that amount. Respondent in his notice of deficiency disallowed $15,960.61 of the expense for travel and entertainment claimed as a deduction on the consolidated return of Honolulu and subsidiaries for the fiscal year ended June 30, 1959, as not representing ordinary and necessary business expenses. The amount of $10,000 included in this disallowance of $15,960.61 is the $10,000 portion of travel and entertainment expenses paid by the Foster partnership in the calendar year 1958 and allocated to Honolulu in its fiscal year ended June 30, 1959. Gains55 from Condemnation Issue 6 Ord and Monterey entered into agreements with the Secretary of the Army in 1951 and 1952, respectively, in accordance with the provisions of the Wherry Act for the lease of land and construction of 500 houses each at Ford Ord Military Reservation, Monterey County, California. Biggs and El Paso entered into similar lease agreements in 1950 with the Secretary of the Air Force for projects at Biggs Air Force Base, El Paso County, Texas, for the construction of 400 houses each. Construction was performed in accordance with the contract between the lessee corporations and T. Jack Foster and V. B. Likins, partners. The construction was financed under Title VIII of the National Housing Act as in effect prior to the enactment of the Housing Amendments of 1955. The four leases were similar. Each was for a term of 75 years, at an annual rental of $100. The leases were subject to termination on default and were expressly for the purpose of erecting, maintaining and operating housing projects in accordance with plans and specifications set forth by the contracting department and the Federal Housing Commissioner. Use and occupation of the houses constructed were56 subject to rules and regulations set forth by the Commanding Officer of the post or base. The Monterey lease provided for termination without cause, but only after 50 years and 6 months of the term had expired and the FHA mortgage interest had terminated. The other three leases did not provide for termination without cause. On October 30, 1957, the United States filed in the United States District Court for the Western District of Texas a complaint in condemnation and declaration of taking against Biggs and El Paso and deposited $2 as estimated just compensation. The deposit was increased on June 6, 1958, by $337,998 representing $171,500 for Biggs and $166,500 for El Paso. The District Court entered judgment on the date of filing that title to the property was in the United States and that just compensation therefor would be ascertained and awarded in the proceeding before it. A similar complaint and declaration of taking were filed on November 1, 1957, in the United States District Court for the Northern District of California against Ord and Monterey with respect to the Ord-Monterey project and a deposit of $782,053 was made as estimated just compensation of $318,827 for Monterey57 and $463,226 for Ord. Each complaint and declaration of taking filed in the above actions alleged that the United States was proceeding under 46 Stat. 1421, 40 U.S.C. 258a and that the "estate," or "property," taken was all right, title and interest of the Wherry corporations arising out of their leases from the Government, together with improvements thereon, and "subject to the interest of" the mortgagee or mortgagees. The encumbrances on the property were listed in the allegations of the complaints and declarations. The Wherry corporations each filed a notice of appearance shortly after the complaints and declarations of taking had been filed in which each stated that it made no objection to the taking of its property, but demanded a jury trial as to just compensation. None of the Wherry corporations reached a voluntary settlement with the United States on the issue of just compensation prior to the rendition of jury verdict and judgment. The Biggs and El Paso projects had been financed through deeds of trust (referred to herein as mortgages) to the benefit of the Republic National Bank of Dallas which mortgages were later assigned to the New York Life58 Insurance Co. (hereinafter referred to as NYLIC). The Ord project had been financed by a deed of trust and a chattel mortgage through the same bank and both were assigned to NYLIC. The Monterey project was financed through a deed of trust and two chattel mortgages to the same bank and all were ultimately assigned to the Greenwich Savings Bank, New York City (hereinafter referred to as Greenwich). The amounts of principal due on each of the mortgages at the date the condemnation suits were filed and amounts on deposit with the mortgagee in escrow and as prepayments with respect to each mortgage were: Escrow andPrincipal Dueprepaid amountsOrd$4,017,879.35$167,787.43Monterey4,101,516,41109,919.48El Paso3,182,707.04212,014.45Biggs3,182,707.04211,218.05$700,939.41The books of the Wherry corporations showed the following adjusted bases in the condemned assets on the date the condemnation suits were filed: Ord$3,342,983.40Monterey3,494,850.61Biggs2,672,706.50El Paso2,654,696.72Greenwich, pursuant to rights which it had as assignee, filed a cross-claim in the District Court for the Northern District59 of California against Monterey for $15,000 attorneys fees on April 10, 1958. This claim was settled in June 1958 for $5,000. Greenwich withdrew its counterclaim and any claim to any compensation due Monterey by stipulation filed August 18, 1958. At some time subsequent to the commencement of the condemnation suit, the United States Government, acting through the Federal Housing Commissioner, and either the Secretary of the Army or the Air Force, entered into "three-party agreements" with NYLIC and Greenwich, which were executed "as of December 27, 1957" and "as of November 1, 1957" in which the United States assumed the liabilities of the Wherry corporations to the mortgagees. These documents bear acknoledgmeent dates as follows: Assumption ofSecretary of ArmyFederal HousingNYLIC orliability of -or Air ForceCommissionerGreenwichOrdMar. 3, 1958Mar. -, 1958 Feb. 21, 1958MontereyJune 23, 1958July 8, 1958June 17, 1958BiggsDec. 27, 1957Jan. -, 1958 Jan. 16, 1958El PasoDec. 27, 1957Jan. -, 1958 Jan. 16, 1958The Wherry corporations did not sign these documents. Supplemental60 agreements were submitted to Biggs and El Paso by NYLIC which stated that in consideration of the assumption by the United States of the mortgages, NYLIC would release Biggs and El Paso of their liability. NYLIC signed these agreements under acknowledgment of June 5, 1958, and transmitted them to Biggs and El Paso under cover letters dated July 11, 1958. By letter dated July 14, 1958, counsel to Biggs and El Paso declined for his client to execute the proposed agreements, stating as a reason that the corporations were protected by the three-party agreements. The consolidated group did not report any income from the condemnations in the return filed for the fiscal year ended June 30, 1958. NYLIC disclaimed any interest in the Biggs-El Paso proceeding at some time prior to August 20, 1958, and in the Ord-Monterey proceeding by a stipulation dated January 30, 1958, and filed August 18, 1958. On August 19, 1958, Ord and Monterey filed motions for withdrawal of the funds deposited by the United States in court. Biggs and El Paso filed similar motions on August 20, 1958. An order for the payment of deposits of $463,226 and $318,827 to Ord and Monterey, respectively, was entered by61 the United States District Court in California on August 21, 1958. Those amounts were withdrawn pursuant to the order on August 27, 1958. An order for the payment of $171,500 and $166,500 to Biggs and El Paso, respectively, was entered by the United States District Court in Texas on August 25, 1958. Those amounts were withdrawn pursuant to the order on September 2, 1958. The cash withdrawn from the courts was deposited in Honolulu's bank account. Plans of liquidation were adopted on August 11, 1958, by each of the Wherry corporations. From and after February 10, 1958, as heretofore set forth, the stock ownership of each of the Wherry corporations was 79 1/3 percent in Honolulu, 15 1/2 percent in Foster, and 1-13/18 percent in each of the three Foster sons. The Wherry corporations each reported the adoption of the plan of liquidation on its separate Federal income tax return for its taxable year ended June 30, 1959, as a liquidation under section 337(a). Each statement related that the principal asset of the corporation was leasehold improvements on which condemnation proceedings were under way, that certain deposits had been received by them during the year but that gain could not62 yet be computed and, if it could, it was not taxable to the corporations. The liquidations were completed on August 8, 1959. On January 21, 1960, a jury verdict was returned in the California District Court condemnation proceeding that the just compensation due Ord and Monterey for their property taken by the United States Government was $1,106,000. On December 4, 1959, the parties had filed a stipulation with the Court in accordance with which a written pretrial order and judgment had been entered that the United States pay Monterey $22,006.16 for prepaid premiums on mortgage insurance and escrowed deposits and pay Ord $16,641.20 for prepaid premiums on mortgage insurance. On January 13, 1960, the Court had entered an order that the United States pay Monterey and Ord, for proration between them, $49,534.58 as compensation for personal property taken from those two corporations on November 1, 1957. Determination of interest on the amounts to be paid for prepaid premiums and escrow deposits was reversed. Ord and Monterey filed a motion for a new trial which was denied on June 22, 1960. The judgment of the Court in accordance with the jury verdict was entered on June 23, 1960. A63 consolidated order of payment was entered June 29, 1960, which briefly recapitulated the amounts paid to and the amounts remaining due Ord and Monterey under all judgments. The parties had stipulated that the trial and award be joint and that Ord and Monterey would prorate the joint award as they saw fit. The consolidated order noted that the total amount of all judgments was $1,194,181.94 and that interest was due on part of that amount. The Court ordered payment by the United States to Ord and Monterey of $467,813.14, the amount remaining due to them including interest. Ord and Monterey appealed from the decision of the District Court to the United States Circuit Court of Appeals for the Ninth Circuit. The Circuit Court affirmed the judgment of the District Court on October 1, 1962. The amount of $467,813.14 remaining due to Ord and Monterey under the judgment and order of payment of the District Court is computed as follows: Total compensation due Monterey and Ord fortaking of propertyper the verdict of the jury$1,106,000.00Amount due Monterey and Ord for taking personal49,534.58propertyDue Monterey and Ord for mortgage insurance paid38,647.36Total due Monterey and Ord as of 6-29-60$1,194,181.94Amount previously paid782,053.00Balance due 6-29-60, exclusive of interestconsisting of: (1) Additional just compensation awarded byjury$323,947.00(2) Agreed amount due for taking of personalproperty49,534.58(3) Mortgage insurance refund due Montereyand Ord38,647.36Total principal due$ 412,128.94Add: (1) Interest at 6% on $373,481.68 from November1, 1957;and(2) Interest at 6% on $38,647.36 from January 13,55,684.201960Total ordered paid June 29, 1960$ 467,813.1464 The District Court in Texas entered a judgment pursuant to a jury verdict in the Biggs-El Paso case on August 7, 1962, in favor of Honolulu, Foster, and Foster's sons in the amount of $1,700,000. The shareholders of Biggs and El Paso had been made parties defendant after liquidation of Biggs and El Paso under the plan of liquidation adopted August 11, 1958. Since the United States had previously deposited $338,000 in court, the amount ordered to be paid was $1,362,000 plus interest. The United States deposited $1,765,920.57 with the Court on August 15, 1962, and that amount was withdrawn by the shareholders of Biggs and El Paso on August 29, 1962. Neither Honolulu and subsidiaries nor Ord, Monterey, Biggs, or El Paso in separate returns reported any income from gain on the condemnation of the properties of the Wherry corporations in any of the years here in issue. Respondent in his notice of deficiency determined that Honolulu and subsidiaries received income for their fiscal year ended June 30, 1958, in that each of the Wherry corporations had a gain at the date of the filing by the United States of the complaint and declaration against it to the extent of the excess of the65 mortgage indebtedness on its property over its basis therein. Respondent also determined that each of the Wherry corporations had income in its fiscal year ended June 30, 1959, from gain on the condemnation when it withdrew deposits from escrow and determined that Honolulu, Foster, and Foster's sons were liable as transferees for the amounts of these deficiencies plus interest. Respondent also determined that Monterey and Ord each had a gain in its separate fiscal period from February 11 through June 30, 1958, from the condemnation of its properties to the extent of the excess of the balance due at the date of filing of the complaint and declaration on its mortgages on its properties over its basis therein and that Honolulu, Foster, and Foster's sons were each liable as transferees for the deficiencies so determined. Respondent recognized that this determination was a duplication of the deficiencies determined against Honolulu and subsidiaries for the fiscal year ended June 30, 1958, because of this same transaction. Claimed Administrative Expense Deduction Issue 7 Honolulu acquired a leasehold in Honolulu, Hawaii, 5 and built a housing project of 250 houses, called Harbor66 Heights, thereon. Honolulu acquired a second leasehold on which 525 houses were built. This project was called Foster Village. Foster Village was developed by Foster Development Corp. (hereinafter referred to as Foster Development) and the construction was done by Foster Homes, Ltd. (hereinafter referred to as Foster Homes). Foster negotiated the leases and obtained the financing for Harbor Heights and Foster Village. He personally guaranteed the financing on the two developments. Interim financing was obtained from the Republic National Bank of Dallas and the Bishop National Bank. Permanent financing was obtained through FNMA. The permanent financing on Foster Village was approximately $5,000,000. Foster personally advanced some funds in connection with the development of Harbor Heights and Foster Village. Foster Homes was incorporated on December 13, 1955, under the laws of Delaware with $10,000 paid-in capital on 1,000 common shares. Foster Development was incorporated on February 13, 1956, under67 the laws of Delaware with $10,000 paid-in capital on 1,000 common shares. Honolulu owned all of the outstanding stock of both of these corporations. The books of Honolulu, Foster Development, and Foster Homes show the following adjusting journal entries as of June 30, 1959: Corporation chargedExpense chargedor creditedor creditedAmountHonoluluFinance fees$ 50,000.00HonoluluFinance fees30,000.00HonoluluAdministrative expense(100,000.00)Foster DevelopmentAdministrative expense105,000.00Foster HomesAdministrative expense75,000.00Foster HomesInterest expense22,648.93Foster HomesOther corporate expense142,351.07$325,000.00 The amount of $325,000 represents payments of $50,000 to Foster in December 1958, of $200,000 to Foster on June 30, 1959, and of $75,000 to Foster & Sons for the year ended June 30, 1959. Foster reported the payments to him as income on his personal income tax returns for the years 1958 and 1959 and Foster & Sons reported the payment to it on its partnership return of income for the year 1959. The returns for the taxable years ended June 30, 1957, 1958, and 1959 filed by the various corporate68 petitioners disclose no salary paid to Foster. Foster received no salary from Foster Homes or Foster Development during any period here pertinent. On the consolidated income tax return filed for the fiscal year ended June 30, 1959, deductions were claimed in the total amounts of $260,000 for administrative expense, $22,648.93 for interest, and $142,351.07 for "other corporate expenses." In his notice of deficiency respondent disallowed these deductions stating "they do not represent ordinary and necessary business expense" and they "do not represent an allowable deduction." Since respondent determined that the reduction by Honolulu of its administrative expense by $100,000 was improper, he increased the deduction of Honolulu by $100,000, making a net disallowance of $325,000 of administrative expense for Honolulu and subsidiaries for their fiscal year ended June 30, 1959. Whether Honolulu Had a Gain from Distributions in Liquidation by the Wherry Corporations Issue 8 The amounts of the deposits with the United States District Courts in Texas and California withdrawn in August and September 1958 with respect to the various projects were as follows: Cor-Date ofAmountporationWithdrawalWithdrawnOrdAugust 27, 1958$ 463,226.00MontereyAugust 27, 1958318,827.00BiggsSeptember 2, 1958171,500.00El PasoSeptember 2, 1958166,500.00Total$1,120,053.0069 The cash was deposited in Honolulu's bank account and appropriate credit made on Honolulu's books to Foster who owned 15 1/2 percent of the stock of each Wherry corporation and to his sons who together owned 5 1/6 percent. Upon receipt of the cash, Honolulu entered on its books a credit of $888,576.13 to "Gain on Sale of Assets," which represented its 79 1/3 percent share of the total amounts withdrawn from the courts. As of June 30, 1959, Honolulu debited "Gain on Sale of Assets" by $888,576.13 and "credited intercompany amounts due to El Paso and Biggs of $134,073.45 each, and Ord and Monterey, $310,214.62 each." All the assets of each of the Wherry corporations were distributed to its shareholders on or before August 8, 1959. The balance sheets attached to the Federal income tax returns filed by Ord, Monterey, Biggs, and El Paso for the taxable period February 11 through June 30, 1958, and the fiscal year ended June 30, 1959, show deficits in earned surplus at the date and in the amounts as follows: FebruaryJuneJune10, 195830, 195830, 1959Ord$674,681.99$675,894.96$681,232.24Monterey602,121.27603,856.64611,068.55Biggs523,435.00524,034.80524,304.79El Paso555,469.45555,870.76555,824.4870 The balance sheets attached to the Federal income tax returns of the Wherry corporations for the fiscal year ended June 30, 1959, show, in addition to mortgages payable which were with respect to the properties condemned by the United States, reserve for depreciation and capital surplus (which was used by respondent to reduce the book bases of the leasehold assets condemned to eliminate increases made in the bases of those assets which increased bases were credited to capital surplus), only the following liabilities as of June 30, 1959: Accounts andCapital stocknotes payableAccrued taxesSec. 337 gainclass BOrd$101,353.71NoneNone$15,000Monterey31,687.15NoneNone15,000Biggs52,531.65$25,986.88$13,157.6615,000El Paso81,800.0025,983.411,598.3815,000 The only difference in these liabilities and those shown as of June 30, 1958 was that accounts and notes payable were shown by these corporations as of the earlier date in the respective amounts of $95,394.54, $91,188,38, $103,729.52 and $101,577.04 and Biggs and El Paso showed no "Section 337 Gain." Honolulu on its consolidated income tax return for the fiscal71 year ended June 30, 1959, did not report any gain from the receipt of its share of the amounts withdrawn from the courts in August and September 1958. Respondent, in his notice of deficiency, determined that Honolulu received $888,576.13 from the Wherry corporations as distributions in liquidation during its fiscal year ended June 30, 1959 and that Honolulu's adjusted basis of the stock of these corporations was zero. Respondent, therefore, considered the entire $888,576.13 to represent a capital gain to Honolulu. Transferee Liability Issue 9 After withdrawal of deposits from the United States District Courts in California and Texas where the condemnation proceedings were pending, the Wherry corporations deposited in Honolulu's bank account the amounts of such withdrawals which were credited to the shareholders of the Wherry corporations by Honolulu as follows: Amounts withdrawn from escrow account ofOrdMotereyyBiggsEl PasoTotal$463,226.00$318,827.00$171,500.00$166,500.00$1,120,053.00Creditedto: Honolulu -$367,492.63$252,936.09$136,056.67$132,090.00$ 888,575.39 79 1/3percentT. Jack71,800.0349,418.1926,582.5025,807.50173,608.22Foster -15 1/2percentT. Jack7,977.785,490.902,953.612,867.5019,289.79Foster,Jr. - 113/18percentJohn R.7,977.785,490.912,953.612,867.5019,289.80Foster - 113/18percentRichard H.7,977.785,490.912,953.612,867.5019,289.80Foster - 113/18percent$463,226.00$318,827.00$171,500.00$166,500.00$1,120,053.0072 Honolulu received the Ord-Monterey and Biggs-El Paso cash distributions on August 27, and September 2, 1958, respectively. The individual shareholders received their credits for their portions of the distributions from all the Wherry corporations on September 5, 1958. By August 8, 1959, all the assets of the Wherry corporations, including the claim of each such corporation against the United States Government in connection with the condemnation proceedings had been distributed to its shareholders. These claims of the Wherry corporations against the United States were satisfied at the times and in the amounts as follows: Remaining just compensationDatePrincipalInterestOrdMontereyJuly 6, 1960$ 412,128.94 $ 55,684.20BiggsEl PasoAugust 29, 1962$1,362,000.00403,920.5773 Prior to the entry of the final order of the courts for payment to the Wherry corporations, the parties to the two condemnation proceedings had agreed at pretrial conferences that the two housing projects involved in each proceeding would be deemed one and that the final award would be one sum to be prorated by the respective corporations by agreement between them. Each corporation, or its distributees, received one-half of the final award in the proceeding to which it or they were a party, as follows: PrincipalInterestTotalOrd$206,064.47$ 27,842.10$233,906.57Monterey206,064.4727,842.10233,906.57Biggs681,000.00201,960.28882,960.28El Paso681,000.00201,960.29882,960.29Respondent determined that Honolulu, Foster, and Foster's three sons were liable as transferees of Ord, Monterey, Biggs and El Paso in the amounts set forth heretofore and by amendments to answer increased or reduced the amounts as determined in his notices of liability as heretofore set forth. Ultimate Facts Honolulu, Foster, and Foster's three sons are liable as transferees of the assets of the Wherry corporations for any Federal income taxes and interest74 thereon due by those corporations for the years here involved to the extent of the respective distributions from those corporations credited to them on September 5, 1958, from the distributions made by the Wherry corporations of amounts withdrawn in August and September 1958 from the deposits made by the United States with the courts in which the condemnation proceedings were pending plus the fair market value at the date of distribution of the claims of the Wherry corporations against the United States. Respondent has not shown that the fair market value at the date of distribution of the claims of the Wherry corporations against the United States, which claims were distributed by the Wherry corporations to their stockholders on or before August 8, 1959, exceeded the amount of $88,181.94 determined to be payable for mortgage insurance and escrowed funds and personal property of Ord and Monterey which represented distributions from Ord and Monterey in accordance with the amounts allocated to each in the stipulation agreement and court order with respect to those payments. Opinion Reallocation of Gain on Sale of Topeka Houses Issue 1(a) Section 482 6 authorizes the Commissioner75 to reallocate income or deductions among related organizations, if necessary, to prevent evasion of taxes or clearly to reflect income. Respondent's regulations provide that section 482 applies in the case of any controlled taxpayer, whether such taxpayer makes a separate return or a consolidated return. If a controlled taxpayer is a party to a consolidated return the "true consolidated taxable income of the affiliated group and the true separate taxable income of the controlled taxpayer are determined consistently with the principles of a consolidated return." 76 Respondent takes the position that the sole purpose in the transfer by Topeka of the houses to Ord, Monterey, Biggs, and El Paso was to shift to those corporations income which otherwise would have been realized by Topeka in order that the corporations to which the houses were transferred might realize separate income against which to offset separate net operating loss carryovers part of which would expire if not used in the fiscal year ending June 30, 1957. Petitioners argue that there was a business purpose in Topeka's disposing of its houses and that the gain on Topeka's transfer of the houses to the Wherry corporations is properly eliminated as an intercompany transaction under Sec. 1.1502-31(b)(1)(i), Income Tax Regs.Petitioners' argument does not answer the contention of respondent that the transfer of the houses from Topeka to the Wherry corporations had no purpose other than tax evasion. Assuming that petitioners have shown a business purpose in Topeka's disposing of its houses, they have shown no business reason why the sales of these houses to persons outside the affiliated group should not have been made by Topeka instead of the Wherry77 corporations. It is unlikely that Topeka would have sold the houses to an unrelated purchaser for the price at which it transferred them to the Wherry corporations, since those corporations immediately sold the houses to unrelated parties at a substantial profit. However, even if it be assumed that the transfer value placed on the houses was a fair one, the fact that the transfer by Topeka to the Wherry corporations was an intercompany transfer on which gain is eliminated in filing a consolidated return would nevertheless permit evasion of tax by the transfer. Since there was available to the Wherry corporations separate net operating loss carryovers not available to Topeka, the fact that the entire profit on the sale of the houses to persons outside the affiliated group, as distinguished from only the portion of the profit above the amount used by Topeka as a transfer value, was income of the Wherry corporations enabled those corporations to handle the sales to outsiders in such a way as to make the separate income of each approximate the separate net operating loss carryover available to each. As soon as the Wherry corporations had sold the houses and realized a gain which caused78 them to have separate incomes, the installment notes taken in part payment for the properties were assigned to the common parent of Topeka and the Wherry corporations. In effect, Topeka made only a temporary transfer of the properties to the Wherry corporations to enable the Wherry corporations to use such properties temporarily to receive income to the extent of their separate net operating losses. The temporary transfer of an income-producing asset primarily for the purpose of avoiding tax by making use of a net operating loss of the transferee has been held to justify the reallocation of income and deductions under section 482. Spicer Theatre, Inc. v. Commissioner, 346 F. 2d 704 (C.A. 6, 1965), affirming 44 T.C. 198">44 T.C. 198, and Ballentine Motor Co. v. Commissioner, 321 F. 2d 796 (C.A. 4, 1963), affirming 39 T.C. 348">39 T.C. 348. The fact that Topeka transferred houses in unequal numbers to the Wherry corporations which sold them at amounts resulting in separate taxable income to each of approximately the amounts of the net operating loss carryover of each 7 gives a strong inference of a tax evasion purpose. Petitioners contend that the reason for79 the transfer was partly because the Wherry corporations were seeking financing for new projects in California and Texas and inclusion of the sales profits on their financial statements would improve their borrowing positions and partly because a high rate of default on the part of the ultimate purchasers of the houses was a possibility and the transfer of the houses by Topeka would insulate the group against deficiency judgments under Kansas law. Neither of these arguments is persuasive. There is nothing in the record to show that the Wherry corporations could not obtain financing for any projects they were contemplating developing despite their tax loss carryovers. These corporations had successfully constructed housing projects at two different military bases and during the years in issue derived the major portion80 of their income from rentals. Large depreciation deductions were claimed in each year, which resulted in income deficits for tax purposes but the indication from the record is that the market value of the assets of the Wherry corporations was substantially in excess of their liabilities so that each of the Wherry corporations had a substantial true net worth. Furthermore, the lack of any intent to improve the financial position of the Wherry corporations by the transfer of the houses to them may be inferred from the fact that the contract obligations received from the sales of the houses were transferred to Honolulu after the sales were complete and sufficient income realized by the Wherry corporations to permit use of their separate net operating loss carryovers. Petitioners' argument that the transfer of the houses to the Wherry corporations would protect Topeka against loss on deficiency judgments, should the purchasers default, is also unpersuasive. The Wherry corporations did not assume any liability on the first mortgages, but Topeka was liable on them. Petitioners have made no showing of why a deficiency judgment could not be had against Topeka, even though Topeka had transferred81 the houses to the Wherry corporations. If Topeka was without assets after its transfer of the houses, such a situation could result only from the fact that Topeka received no consideration for the transfer of the houses or disposed of the consideration received by transfer to an affiliate without adequate consideration. If Topeka made a transfer of its assets for inadequate consideration, it would appear that a creditor of Topeka might proceed against Topeka's transferees. Petitioners have certainly not shown otherwise. We conclude from all the facts in the record that the primary purpose for the transfer by Topeka of the houses to the Wherry corporations prior to the sale of the houses to unrelated purchasers, was to enable the Wherry corporations to make use of their separate net operating loss carryovers and, thus, to avoid tax. Therefore, under the holdings in Spicer Theatre, Inc. v. Commissioner, supra, and Ballentine Motor Co. v. Commissioner, supra, respondent is within his authority under section 482 in reallocating gain on the sale of the houses to Topeka unless the fact that Topeka and the Wherry corporations all joined with their common parent, 82 Honolulu, in filing consolidated income tax returns causes the holding in those cases to be inapplicable here. The rationale of permitting the filing of a consolidated return by affiliated corporations is that a business, though fragmented in different legal units, may be a single economic entity and should be allowed the benefits for income tax purposes of a single economic entity. The rationale of the allowance of deductions of a net operating loss carryover is that the vicissitudes of a single business' "lean and fat" years may be averaged out to some extent. That affiliates filing a consolidated return are not viewed as a "single business" for the purpose of a net operating loss carryover from years before the consolidation or for any particular affiliate for years before it entered the consolidation is shown by the regulations 8 which provide for the use of net operating loss carryovers from a year in which an affiliate filed a separate return only to the extent of the separate income of that affiliate included in the consolidated net income for the year to which the loss is being carried. Since the corporate petitioners agreed to accept these regulations, 9 in order to obtain83 the privilege of filing consolidated returns, the regulations control and allow the separate net operating loss carryovers of the Wherry corporations from years for which they filed separate returns to be used only to the extent of their incomes included in the consolidated return. Although affiliated corporations are permitted to file consolidated returns, they "are separate entities for the purpose of net operating loss deductions." Frelbro Corporation, 36 T.C. 864">36 T.C. 864, 877, (1961), reversed on another issue 315 F. 2d 784 (C.A. 2, 1963). Where consolidated returns are filed and there is an attempt to carry a loss from a separate return year to a consolidated year (or to carry a loss from a consolidated year to a separate return year), the limitation that the loss of "one business" may not be used to average out the "income of some other business" is determined strictly under the regulations by considering each separate corporation as a separate "business." A. R. Ruppert Plumbing & Heating Co., 39 T.C. 284">39 T.C. 284 (1962). Here, as in the Ruppert Plumbing & Heating Co. case, the facts "do not warrant a finding" that the businesses carried on by Topeka and84 the Wherry corporations were in substance "the same business." It is, therefore, unnecessary to consider whether if the business were in substance the same, respondent's regulations could be interpreted to permit the loss carryovers of the Wherry corporations to offset income of Topeka. 85 Since the separate loss carryovers of the Wherry corporations cannot be used to offset income of Topeka included in the consolidated income for the fiscal year ended June 30, 1957, it follows that "true consolidated taxable income of the affiliated group" and the "true separate taxable" incomes of Topeka and the Wherry corporations determined "consistently with the principles of a consolidated return" ( Sec. 1.482-1(b)(2) Income Tax Regs.), requires that Topeka not be permitted in effect to shift its separate income for the fiscal year 1957 to the Wherry corporations. We, therefore, sustain respondent's determination reallocating the gain on the sale of the houses which Topeka transferred to the Wherry corporations to Topeka under section 482. Since we have sustained respondent's reallocation of income under section 482, it is unnecessary to consider his alternative contention that if the gain on the sale of the houses is properly that of the Wherry corporations for income tax purposes, it constitutes ordinary income and not capital gain. Method of Applying Separate Net Operating Loss Carryovers Issue 1(b) The first difference between the parties86 with respect to proper application of separate loss carryovers of some of the affiliated corporations to the separate incomes of those corporations concerns the fiscal years ended June 30, 1954 and 1955, in each of which the affiliated group had a consolidated net loss prior to application of net operating loss carryovers. The determination of the application of the loss carryovers in the fiscal years ended June 30, 1954 and 1955 is necessary in order to ascertain the amount of separate net operating loss carryovers of certain affiliates and the consolidated net operating loss carryover available for use in the fiscal year ended June 30, 1957, the first year in issue in this case, and subsequent years. Petitioners take the position that the separate net operating loss carryover of a particular subsidiary that had separate net income could be used to apply against that subsidiary's separate net income, thereby increasing the overall net operating loss carryover of the consolidated group even though the consolidated group had a consolidated loss prior to application of any net operating loss carryover. Respondent contends that in years in which the consolidated group had a consolidated87 net loss prior to application of a net operating loss carryover, no separate net loss carryover of any affiliate may be used. This precise issue was involved in Phinney v. Houston Oil Field Material Company, 252 F. 2d 357 (C.A. 5, 1958). That case was concerned with consolidated returns filed under Treasury Regulations issued under the Internal Revenue Code of 1939, but the section dealing with the carryover and carryback of separate net operating losses was substantially the same as section 1.1502-31(b)(3) of the regulations applicable to the years involved in the instant case. 10 In Phinney v. Houston Oil Field Material Company, supra, the Court held the consolidated net operating loss of an affiliated group could not be increased by first using the separate net operating loss of an affiliate which had separate income to offset the income of the affiliate. In so holding the Court stated that to allow such an increase in the consolidated net operating loss would be contrary to the regulation which states that the "net income of an affiliate for consolidated return purposes shall be computed without benefit of a net operating loss deduction." Section 1.1502-31(b)(1)(ii), Income Tax Regs.88 , applicable to the years here in issue in substance contains the same provisions, and Section 1.1502-31(a)(1) provides that the "consolidated taxable income shall be the combined income of the several affiliated corporations" minus "any consolidated net operating loss deduction." We agree with the reasoning in the Phinney case. Unless there is consolidated net income prior to the use of any net operating loss carryover, there is no income of the consolidated group against which to apply a carryover and therefore no reason for application of a carryover. We therefore sustain respondent in his determination that the separate loss carryovers may not be applied against the separate incomes of the corporations having such separate carryovers in years in which there was a consolidated net operating loss prior to the application of any net operating loss carryovers. The second problem as to the application of loss carryovers deals with the use of separate net operating loss carryovers in years when there was net income89 of the consolidated group prior to application of net operating loss carryovers. The only provision of the regulations with respect to this problem is that the amount of a separate net operating loss carryover which may be used shall not exceed the separate net income of the particular affiliate having the separate net operating loss carryover. However, the same reasoning applied in holding that no separate net operating loss carryover may be used in a year in which there is no consolidated net income prior to the use of any net operating loss carryover, leads to the conclusion that the amount of the consolidated net income prior to the use of any net operating loss carryover is the limitation on the total amount of net operating loss carryover that may be used. As an example, on the basis of the returns as filed by petitioners which showed a consolidated net income for the fiscal year ended June 30, 1957, prior to the use of any net operating loss carryover, in the amount of $218,761.76, we would conclude that net operating loss carryovers in excess of this amount could not be used. 11 Having determined this limitation on the total amount of net operating loss carryover which may90 be used for the fiscal year ended June 30, 1957, it becomes necessary to determine what portion of this total may constitute separate loss carryovers of affiliates with separate net incomes. We recognize that under respondent's regulations, these separate net operating loss carryovers are a part of the consolidated net operating loss carryover limited in use by the income of the affiliate using such separate carryovers. The theory of the regulations, as we have heretofore stated, appears to be that a loss generated by one business enterprise may not be used to offset income of another business enterprise. Absence this specific provision of the consolidated regulations to which the corporate petitioners agreed in order to be entitled to file consolidated returns, an inquiry might be required as to the similarity of the business enterprises of the various corporations in the consolidated group such as is involved in cases of mergers or other reorganizations. However, the regulation with respect to consolidated returns seems to require no such inquiry. In any event, it is not necessary in the instant case to consider the proper construction of respondent's regulations in this respect91 since there is no evidence in the record to warrant a finding that the various affiliated corporations were engaged in substantially the "same business" for net operating loss carryover purposes. See A. R. Ruppert Plumbing & Heating Co., supra.Under respondent's regulations it seems logical to conclude that each subsidiary which has both separate income and a separate net operating loss carryover can use the separate loss carryover to the extent that its separate income contributed to the overall amount of consolidated net income from which is subtracted the total of the losses of all the affiliates reporting separate losses. In other words, the $218,861.76 consolidated net income reported by Honolulu and subsidiaries would be prorated to each affiliate reporting a separate income on the basis of applying to that amount the percentage that the income reported by that affiliate bore92 to the total of the separate incomes reported by all affiliates reporting separate incomes. If only those affiliates that had separate net operating loss carryovers also had separate net incomes, this would amount to prorating the consolidated net income among them. However, this is not the factual situation in this case. Some of the affiliates which had separate net incomes did not have separate net operating loss carryovers. However, it seems no more logical to indirectly increase the consolidated net operating loss carryovers by permitting the separate net operating loss carryovers of affiliates which have both such carryovers and separate incomes to be used to the full extent of the total consolidated net income of the group, thus freeing any consolidated net operating loss carryover from prior years which otherwise would be used to offset separate incomes of affiliates which reported separate incomes but had no separate net operating loss carryover, for use in subsequent years, than it is to directly increase the consolidated net operating loss carryover by permitting separate carryovers to be used by affiliates having separate incomes in years when there is a consolidated net93 loss. We therefore hold that the amount of the consolidated net income, prior to application of any net operating loss carryover, is to be prorated among all affiliates reporting separate incomes whether or not such affiliate has a separate net operating loss carryover on the basis that the income reported by such affiliates bears to the total of the income reported by all affiliates reporting income. The amount of income so allocated to each affiliate which has a separate net operating loss carryover, will be the maximum extent to which such separate net operating loss carryover may be used in computing the taxable consolidated net income. In view of our holding that respondent correctly reallocated the income from the sales of certain houses from the Wherry corporations to Topeka, the issue with respect to the application of separate net operating loss carryovers will have substantially less effect on the consolidated tax liability for any of the years here in issue than would be the case had we not approved the respondent's reallocation of income to Topeka. However, since it appears that the method of applying the separate net operating loss carryovers will have some effect94 on the amount of the consolidated tax liability in each year here in issue, we consider it necessary to decide the issue. Distributions by Ord and Highland Park in the Fiscal Year 1956 Issue 1(c) Petitioners take the position that distributions made by Ord and Highland Park to Honolulu in the fiscal year 1956 were dividends and therefore under the provisions of section 1.1502-31(b)(2)(ii)12 were excludable in computing consolidated net income. In the alternative, petitioners contend that if the amounts were not dividends, they should be eliminated from consolidated income under the provisions of section 1.1502-31(b)(1)(i) which provides for the elimination from consolidated income of "unrealized profits and losses in transactions between members of the affiliated group and dividend distributions from one member of the group to another member of the group." Petitioners argue that since the distributions were with respect to stock, they were dividends and therefore the "cost basis" of Honolulu in the stock is not a consideration in determining whether the amounts are includable in Honolulu's income. 95 The first problem therefore is whether the distributions made by Ord and Highland Park to Honolulu in the fiscal year 1956 constituted dividends. Respondent's consolidated regulations, section 1.1502, nowhere define "dividends". However, these regulations in section 1.1502-2(f), provide that "Terms which are defined in the Code shall, when used in the regulations under section 1502 have the meaning assigned to them by the Code, unless specifically otherwise defined." Therefore, in determining whether a distribution from a subsidiary to a parent of an affiliated group filing a consolidated return is a dividend, it is necessary to turn to the definition of dividend contained in section 316 of the Internal Revenue Code. Section 316 provides that the term "dividend" means any distribution of property made by a corporation to its shareholders out of its accumulated or current year's earnings or profits. 1396 As we have set forth in our findings, Ord and Highland Park each had a loss for the fiscal year ended June 30, 1956 and the separate balance sheet of each of these corporations included with the consolidated return filed showed that each had an "earned deficit," as of the end of June 30, 1955 and June 30, 1956. From these facts we conclude that neither Ord nor Highland Park had any accumulated earnings or profits as of June 30, 1955 or June 30, 1956. Therefore under the definition contained in section 316 any distribution which they made to their stockholder fails to meet the definition of dividend and may not be considered as the distribution of a dividend. It therefore becomes necessary to consider petitioners' alternative contention that the amounts of these distributions should be eliminated as "unrealized profits * * * in transactions between members of the affiliated group * * ." ( Sec. 1.1502-31(b)(1)(i), Income Tax Regs.) The distributions made by Ord and Highland Park to Honolulu were made to Honolulu as the owner of their stock and were "distributions with respect to stock." Respondent determined to this effect and there are no facts to97 show to the contrary nor does petitioner contend to the contrary. Such facts as are in the record indicate that the distributions were with respect to stock. The provision for the elimination of "profits" in transactions between members of an affiliated group is to be read in its normal context, and so read must be considered as referring to the exchange by one affiliate of money or other property for property, goods of, or services rendered by another affiliate. We therefore conclude that the nature of the distributions by Ord and Highland Park must be characterized as a distribution with respect to stock under the general definition of the terms in the Code. ( Section 1.1502-2(f), Income Tax Regulations). Section 301(a) provides that the distribution of property, which is defined to include money as well as other property, made by a corporation to a shareholder with respect to stock shall be treated in the manner provided in section 301(c).14 Section 301(c) provides that the portion of the distribution which is a dividend shall be as defined in section 316 and that the portion of the distribution which is not a dividend shall be applied against98 and reduce the adjusted basis of the stock and that the portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property. Therefore, under the provisions of section 301(c)(3), the portion of the distribution by Ord and Highland Park to Honolulu in the fiscal year 1956 that exceeded the basis of Honolulu in the stock of Ord and Highland Park, shall be treated as gain from the sale or exchange of property. This conclusion is in accordance with our holding in American Water Works Co., 25 T.C. 903">25 T.C. 903 (1956), affirmed on this issue and reversed on another issue 243 F. 2d 550 (C.A. 2, 1957). In that case we held that the basis of the stock of an affiliate should be reduced by distributions made by that affiliate not out of earnings and profits during the years when consolidated returns were filed. In so holding we relied on a provision of respondent's regulations that the basis of stock of the issuing corporation held by each member of the affiliated group other than the issuing corporation should be separately determined for each member of the group and99 adjusted in accordance with "the Code" in order to determine gain or loss on the sale of such stock. In American Water Works Co., supra, we stated, at page 912, the following: The petitioner argues that there should be no reduction in the basis of its stock in Texarkana due to the capital distributions made to it by Texarkana in years when consolidated income tax returns were filed by the two corporations. No support for the petitioner's argument can be found in section 23.31(d)(2) of Regulations 104. This section states that capital gains and losses on a consolidated return shall be determined without regard to "gains or losses arising in intercompany transactions." Such a transaction is not before us. We have in this case a sale of stock by the petitioner to a party outside the affiliated group, and any gain arising from such sale cannot be regarded as arising in an intercompany transaction. * * * 100 In the instant case we are concerned with the provisions of section 1.1502-31(b)(2)(iii)(a) of respondent's regulations providing that capital gains on transactions between members of an affiliated group shall be eliminated in determining consolidated taxable income. 15101 Since, as we have stated, the distributions by Ord and Highland Park to Honolulu are to be treated under section 301(c) as "gain from the sale or exchange of property," the gain would be a capital gain. Since the distribution was by the subsidiary to its parent, the gain arises in an "intercompany transaction." Therefore, the specific language of respondent's regulations provides that in the computation of the incomes of the various members of the affiliated group, of which, of course, Honolulu is one here, to be used in determining the consolidated net income or loss, the determination shall be made without regard to the gain arising in this transaction. The transaction is not within either of the exceptions contained in respondent's regulations. Respondent, in his brief, makes no argument as such against the application of section 1.1502-31(b)(2)(iii)(a) but merely cites and relies on Revenue Ruling 57-201, 1 C.B. 295">1957-1 C.B. 295. In this ruling respondent states as his position that the gain accruing to a parent corporation from cancellation of its indebtedness to a subsidiary is recognized in computing consolidated income to the extent that the advances from the subsidiary102 exceed the basis of the subsidiary's stock in the hands of the parent. Under the provisions of section 301(c), such excess is taxable in the same manner as gain from the sale or exchange of property and constitutes capital gain. In justification for ignoring the provisions of section 1.1502-31(b)(2)(iii)(a) of his regulations, respondent states as follows in his ruling: The general design of the consolidated return regulations permits transfers of property between members of an affiliated group which files a consolidated return to be made without present tax consequences if no ultimate tax advantage is gained thereby. Thus, section 1.1502-31(b)(2)(iii)(a) of the Income Tax Regulations provides, in effect, that capital gains on sales or exchanges between members of an affiliated group shall be eliminated in determining consolidated taxable income. The possibility that this rule could lead to tax avoidance is obviated by section 1.1502-38(b) of the Income Tax Regulations which provides that the basis of property in the hands of one member of an affiliated group shall remain the same when it is transferred to another member103 of the group. Thus, the gain remains potentially taxable after the transfer of property and is recognized if the property is then sold outside of the affiliated group. However, this safeguard would not be present if the gain which results from the distribution in the instant case were eliminated in computing consolidated taxable income. Since no property other than cash is transferred, there is, of course, no carry-over of basis; and, although the distribution reduces the basis of the subsidiary's stock in the hands of the parent to zero, there is no adjustment to reflect the amount of distribution in excess of the basis of such stock. If the parent sold the stock at a later date, any gain then recognized for income tax purposes would be less than the actual gain on its investment in the subsidiary. Thus, if gain were not recognized upon the distribution, the excess of the distribution over P's basis of the stock would completely escape taxation, contrary to the express purpose of Congress and the design of the regulations. Compare section 1.1502-37(a)(1)(ii) of the Regulations which provides for the inclusion of gain on the receipt of certain cash distributions from a member of104 an affiliated group in cancellation or redemption of its stock. * * The substance of respondent's statement in this ruling is that something specifically provided to the contrary in his regulations shall be used in the computation of consolidated income since otherwise there is a possibility of certain income escaping tax. Under similar circumstances, we specifically refused to follow a ruling by respondent in Henry C. Beck Builders, Inc., 41 T.C. 616">41 T.C. 616, 628 (1964). In so doing we stated: Respondent has broad power to amend his regulations. He must have known of this "loophole" before the deficiency notice was sent in this case. Revenue Ruling 60-245, 2 C.B. 267">1960-2 C.B. 267, involving an almost identical set of facts, appeared 2 months before the date of the notice. Respondent there cited no provision of the Code or regulations to support his view that the parent should be taxed on the previously eliminated profit when the parent disposed of the subsidiary's stock. [footnote omitted] Respondent's reluctance to use his conceded power in this area to set forth rules of general application * * * does not justify in this case a judicial improvisation to prevent105 a reduction of the revenue that is problematic in both nature and amount. [footnote omitted] The same statement is equally applicable to the situation here involved. It is problematical whether the amount distributed to Honolulu by Ord and Highland Park has not in effect been a part of the consolidated income which has been subject to tax. Here it would appear that the situation is as in respondent's revenue ruling 57-201, supra, that the "corporation receives rental income from property that it owns, but, principally due to the deduction for depreciation, it has no taxable income or earnings and profits for tax purposes." However, except for the income from which the depreciation was deducted, Ord and Highland Park would be unlikely to have available an amount to distribute in cash to Honolulu. Had the corporations not had and reported this income, their losses would undoubtedly have been greater and the reduction in tax which might have resulted from such increased losses is quite "problematic." Expressed another way, to the extent that the cash which was distributed to the parent was accumulated by the subsidiaries during consolidated years, it very likely has in some way106 been taxed as an overall part of the consolidation. The fact that respondent in connection with redemption of stock issued a specific regulation which we will subsequently discuss, does not justify reaching a conclusion specifically contrary to another portion of his regulations where he has not chosen to change those regulations. In affirming in part our decision in American Water Works Co., supra, the Circuit Court stated with regard to the provision of the regulations there under consideration comparable to section 1.1502-31(b)(2)(iii)(a) of the present regulations (243 F. 2d 550, 554): * * * Thus taxpayer fails to distinguish between (1) the treatment of capital distributions from the issuing corporation to the stockholder corporation for the purpose of computing their consolidated net income in the year of the intercompany distribution, and (2) the treatment of these same capital distributions for the purpose of determining the basis of the stock of the issuing corporation in the hands of the stockholder corporation when that stock is subsequently sold to an outsider. Even though the Circuit Court proceeded to discuss the fact that Congress did107 not intend such a "windfall" as would result to the taxpayer there involved if the basis of the stock were not reduced by prior distribution, there is nothing to indicate that the Court intended to hold that respondent's regulations specifically providing for elimination of capital gain from transactions between members of the affiliated group should not control in a situation such as we have in the instant case. The Court in its opinion referred to the Treasury regulations in connection with consolidated returns as having "in effect, the force of law." We therefore hold that the distributions made by Ord and Highland Park in 1956 are properly used to reduce petitioners' bases in the Ord and Highland Park stock, but to the extent that the distributions exceed Honolulu's basis in the stock they are to be treated as capital gains in transactions between members of the consolidated group and the computation of the consolidated net income or loss for the year 1956, for the purpose of determining the net operating loss carryover to the fiscal year ended June 30, 1957, is to be made by determining Honolulu's income without regard to this capital gain. Gain on the Redemption of the Ord108 and Monterey Stock Issue 2 After obtaining permission from the FHA in accordance with a requirement applicable to Wherry corporations, Ord and Monterey, in the fiscal year ended June 30, 1957, redeemed all of their class A stock held by Honolulu. Respondent determined that Honolulu received long-term capital gain on this redemption which should be included as such in computing consolidated taxable income of Honolulu and its subsidiaries. It is respondent's position that this determination is strictly in accordance with the provisions of section 1.1502-37(a)(1)(i) and (ii), Income Tax Regs., 16 which provides an exception to the nonrecognition of gain or loss upon a distribution during a consolidated return period by one member of an affiliated group to another member where the distribution is in cancellation or redemption of all or a portion of the stock of the affiliate making the distribution. The exception to which respondent refers is where a distribution is one made in cash in an amount in excess of the adjusted basis of the stock. 109 Petitioners argue that this regulation applies only to distributions in liquidation which the instant distribution in redemption of the class A stock was not. We do not agree with petitioners' interpretation of the regulation since we think the clear import of this regulation is that section 1.1502-37(a)(1)(i) is applicable in case of a complete liquidation and redemption of all stock where the corporation terminates its business, and section 1.1502-37(a)(1)(ii) provides for a situation where there is a redemption of all or a portion of the stock without such a liquidation and termination of business being required. Technically, since the two are in separate paragraphs and precede a third paragraph, (iii), which follows the word "or" this is the logical interpretation. Also, we interpreted this provision in Henry C. Beck Builders, Inc., supra, at page 631, to apply to a redemption not in complete liquidation. Petitioners' reliance on section 1.1502-33 17 is misplaced since that section specifically provides for the taxability of gain or loss on disposition of stock in intercompany transactions except where the disposition is by sale or in complete or partial liquidation110 not involving cash in excess of the adjusted basis of the stock. In the instant case111 the disposition of Ord and Monterey stock was by redemption of the class A stock and not by sale or by complete liquidation and there was cash in excess of basis involved. We therefore sustain respondent in his determination that to the extent the amounts paid by Ord and Monterey to Honolulu in redemption of their class A stock exceeded Honolulu's basis in that stock, Honolulu realized capital gain includable in consolidated net income. Petitioners next argue that the redemption price was less than Honolulu's basis in the stock. The answer to this contention is governed by whether respondent properly reduced the basis of the Ord stock to zero because of the distribution to Honolulu in 1956 and the basis of the Monterey stock by the $36,000 distribution Monterey made to Honolulu in 1956. The issue here is precisely the same as that involved in American Water Works Co., supra, and on the basis of that case we hold that respondent did properly reduce the basis of the Ord and Monterey stock because of the 1956 distributions. As we pointed out previously, these corporations had no earnings or profits for the current year or accumulated earnings or profits so the distributions112 were not out of earnings or profits, and therefore reduced the basis of the stock. By amendment to answer, respondent alleged that the remaining basis of the Monterey stock should be reduced to reflect losses which could not have been used by Monterey if Monterey had filed separate returns during the years of consolidation. Sections 1.1502-33 and 1.1502-37 both require that the basis for determining gain or loss on the disposition of stock of an affiliated member of a consolidated group which makes or is required to make a consolidated return shall be adjusted in accordance with section 1.1502-34 of respondent's regulations. This section of the regulations carries a specific provision that the basis of the stock is to be reduced by the sum of "all losses of such issuing corporation sustained during taxable years for which consolidated income tax returns were made * * * to the extent that such losses could not have been availed of by such corporation as net loss or net operating loss in computing its net income or taxable income * * * for such taxable year if it had made a separate return for each of such years." Sec. 1.1502-34(b)(2)(i), Income Tax Regs.113 Respondent therefore is correct that the basis of the stock is to be reduced by losses of Monterey availed of in the computation of consolidated net income which could not have been availed of had Monterey filed a separate return. Petitioners on brief do not argue the point with respect to the further reduction of the Monterey stock, and respondent's computation of the $95,330.54 loss which was availed of which could not have been used had Monterey filed a separate return appears to be a minimum required reduction under the regulations. 18 Respondent made the computation on the assumption that under the provisions of section 1.1502-34(b)(2), a reduction was required of the loss of Monterey for the fiscal years ended June 30, 1954 and 1955, because the consolidated group sustained a consolidated loss "not availed of in prior or subsequent years as a deduction under net loss or net operating loss provisions." 114 This may or may not be the situation after recomputation in accordance with our decision in this case since the results of a recomputation under our decision on all the issues may be that all consolidated losses for the fiscal years ended June 30, 1954 and June 30, 1955, would be availed of by a consolidated group in a subsequent year. However, the computation as made by respondent reduces the amount of the loss of Monterey which could not have been availed of had Monterey filed a separate return. If this adjustment were not made, the result would be a greater and not a lesser reduction of the basis of Monterey stock. Therefore, since respondent made the contention by an affirmative allegation in an amendment to answer, the total amount of reduction applicable to all classes of Monterey stock is the $95,330.54 which he has claimed and alleged even though as a result of the recomputation in this case a higher amount might otherwise appear to be a proper amount. This brings us to the next question of whether respondent has properly distributed the reduction between the class A stock of Monterey redeemed and the class B stock which was not redeemed. Section 1.1502-34(b)(4), Income Tax Regs.115 , provides for this distribution. Respondent in making the computation, assigned a basis of $200,000 to the class A stock redeemed and $15,000 to the class B stock not redeemed. However, the stipulated facts are that the basis of Honolulu in the class A stock of Monterey was $215,000 and the only evidence in the record as to the basis of the class B stock is the statement on the balance sheet of Monterey showing as a liability class B capital stock in the amount of $15,000. Since this is an affirmative allegation on the part of respondent, he must prove all the necessary facts to make the determination. It may be that the class B stock did not have a basis of $15,000 in addition to the $215,000 basis stipulated to be that of the class A stock, but respondent has failed to show that this is a fact and therefore we hold that in prorating the reduction in basis to the various classes of stock the value of the class A stock to be used is $215,000 and the value of the class B stock is $15,000. Our holding with respect to the requirement for a reduction in the basis of the stock redeemed for losses of Monterey during the consolidated period which that corporation could not have availed116 itself of if it had filed a separate return is in accordance with our holding on a similar issue in Henry C. Beck Builders, Inc., supra.Deduction of Legal and Appraisal Fees Issue 3 The first of the items which respondent disallowed as a deduction was the amount of $2,700 paid by Ord and Monterey for legal services to secure permission to redeem their stock held by Honolulu. This amount was paid during the fiscal year ended June 30, 1957. There is no question that it was not a necessary payment since the FHA required obtaining permission to redeem the stock. The facts show that the redeemed stock was cancelled. The redemption involved all of the class A stock of Ord and Monterey and none of the class B stock. Petitioners make no argument as to the legal nature of the expenditure in connection with the redemption of the stock. Respondent, in his brief, argues that the expenditure should be added to the cost of "Treasury stock acquired by the corporation." However, the facts show that the redeemed stock was cancelled and therefore there is no "treasury stock" acquired by the corporation to add this expense to as a basis. We agree with respondent that the item117 is of the nature of selling expenses in connection with the sale of stock. Ordinarily, this would be considered as increasing the amount paid for the stock and would become a part of the cost and basis of an asset acquired. In the instant case, Ord and Monterey redeemed their stock and so had no asset, the basis of which could be increased. Under these circumstances the amount is in the nature of an amount expended in an effort to acquire a capital asset which results in a failure to acquire the asset. On this analogy we conclude that petitioners are entitled to deduct the $2,700 payment. The next item involved in respondent's disallowance of legal and appraisal fees is an amount of $17,500 which is a portion of the $20,000 paid in 1958 to the attorney who generally handled the legal affairs of the Foster corporations and partnership. The services were rendered during the fiscal year ended June 30, 1956, and all the evidence shows with respect to these services is that the law firm to which the fee was paid had been counsel to the Foster organization since 1950 and that the fee did not relate to services performed with respect to the condemnations of the properties of the Wherry118 corporations. The bill for the fee showed that it was for services rendered to all Foster companies during the year 1956. The only problem here is whether there is any justification for allocating the sum of $17,500 to Honolulu and its subsidiaries leaving only $2,500 as applicable to the partnership or any other work that might have been done for Foster which was not in connection with Honolulu and its subsidiaries. The only evidence with respect to this allocation is the testimony of Foster that an effort to properly allocate items was made. He could not remember precisely what the fee was for, nor how the amount was allocated. A difficult problem is posed here since the burden of proof rests on petitioners to show that the $17,500 was a proper deduction for Honolulu and its subsidiaries. Although the proof is meager, we are satisfied that the entire $20,000 was a proper business expense deduction and that to the extent of the $17,500 it has not been taken as a deduction by any of the other Foster interests. We also give some weight to the fact that there does not appear to be any particular tax benefit in the method used to allocate the fee and for this reason it is unlikely that119 the allocation was made otherwise than in accordance with the best judgment of the employees of the Foster interests charged with the responsibility of the company's books as to the portion of the legal services rendered to the various Foster interests. We therefore hold that Honolulu and its subsidiaries are entitled to the deduction of the $17,500 as a business expense. Respondent argues that since the legal fees were for services rendered in the fiscal year 1956, the amount of such fee should have been accrued by Honolulu and subsidiaries in that year and deducted in computing the income for that year and not deducted in the fiscal year ended June 30, 1958, when the amount was paid. The evidence here shows that there was no agreement between Honolulu and its subsidiaries and the attorneys as to the amount of the legal fee and that the amount of the fee for the services was not reasonably ascertainable by Foster or any of the Foster employees or by Honolulu or its subsidiaries until the receipt of the bill. Therefore, even if we assume that the corporate petitioners were on an accrual basis of accounting, the legal fees were not accruable prior to 1958 when the bill for services120 was received. Lanova Corporation, 17 T.C. 1178">17 T.C. 1178, 1186 (1952). We therefore agree with petitioners that the $17,500 was properly deductible in the fiscal year ended June 30, 1958. The remaining items in issue, if petitioners are still contesting these adjustments, are $500 of an amount paid for a legal opinion with respect to procedure in the condemnation proceedings and a $5,000 legal fee and $9,000 appraisal fee paid with respect to these condemnation proceedings. It is not clear whether petitioners now concede that these adjustments are proper. In any event, the evidence shows that these items were expenses in connection with the disposition of the properties of the Wherry corporations in the general nature of selling expenses. Respondent has allowed these items as expenses in computing the gain in connection with the condemnation. Respondent's adjustment in this respect is correct, and we sustain respondent in his disallowance of these amounts as deductions for business expenses and hold he was correct in considering the amounts to be a reduction of the amount received on the disposition by condemnation of the properties of the Wherry corporations. Deductibility121 of Expenses in Connection with Acquisition of PropertyIssue 4 Respondent disallowed a total amount of $120,811.04 claimed as a deduction by Lomita for the fiscal year ended June 30, 1957, and treated the amount as a part of the basis in the properties acquired by Lomita which it subsequently sold. Two of the items involved in the total of $120,811.04 disallowed by respondent are $66,257.30 and $14,687.32 of bank charges in the nature of interest expense which had been incurred by California Development Company before the San Jose property which was being developed by that company was transferred to Lomita. It is well settled that expenses of a preceding owner of property paid by the person acquiring such property, irrespective of what would be the nature of the expenses to the prior owner, are a part of the cost of acquiring the property by the person so acquiring the property and become a part of the basis or purchase price of the assets acquired. Such payments are capital expenditures and not current expenses or losses to the individual who acquires the property. Holdcroft Transp. Co. v. Commissioner, 153 F. 2d 323 (C.A. 8, 1946), affirming a Memorandum Opinion122 of this Court. One of the remaining items composing the $120,811.04 was an amount of $1,650.62 which represented costs to Lomita of engineering fees for plans for the development. This item is one of a capital nature and petitioners make no real argument to the contrary. The final item composing the amount disallowed as a deduction and capitalized by respondent is an amount of $38,215.80. The precise nature of this amount is not clear. The stipulation states with respect to this item, "Subsequent to the date of default, Lomita expended for FHA and FNMA commitments the sum of $38.215.80 * * ." If the amount had been paid by Lomita for its own commitments it would appear that it would be of the same nature as the engineering fees and a capital expenditure. However, the testimony shows that the $38,215.80 was a commitment fee with respect to the loan to Colifornia Development Company and that this amount of the commitment fee was applicable to loans which had not been drawn down. The $38,215.80 was apparently a part of the loan assumed by Lomita. If this item was an expense of the previous owner of the property which was assumed and paid by the person to whom the property was transferred, 123 it, like the interest expenses, is properly to be capitalized. Holdcroft Transp. Co. v. Commissioner, supra. The state of evidence in this case does not justify a conclusion that the $38,215.80 was something other than part of the cost of the property to Lomita. The burden of proof with respect to the deduction of the expenses rests on petitioners and petitioners have failed to show that this item is one that is properly deductible. We therefore sustain respondent's determination that the entire $120,811.04 is not deductible as business expense but is an additional cost of the San Jose property acquired by Lomita. Claimed Deductions for Travel and Entertainment Expense Issue 5 The various travel and entertainment expenses disallowed by respondent to Honolulu and subsidiaries in the computation of consolidated income fall basically into two categories. The first is composed of $4,100 of deductions claimed by the Wherry corporations. Of this amount respondent considered $1,500 to be expenses in connection with the condemnation of the property of Wherry corporations and increased the sales expense of those projects by that amount in determining the gain on the124 condemnation of the property. The testimony shows that the Wherry corporations incurred some expenses in connection with repairing certain fixtures in the various houses in the projects and in inventorying certain personal property belonging to the corporations and inspecting the units to determine their condition prior to their condemnation. Since the personal property as well as the leasehold was condemned, the expenses in connection with repairing fixtures to increase their value at the time of condemnation are properly to be considered as a reduction in the price received for the property when sold. The other items for which the expenditures were made are likewise in the nature of selling expenses of the properties. Expenses connected with a condemnation of property are, as those connected with a sale of property by other methods, capital expenditures, which are deductible from the amount received for the property in computing the gain on its sale. William Justin Petit, 8 T.C. 228">8 T.C. 228, 236-237 (1947). Petitioners have the burden of proving that the expenses incurred by the Wherry corporations in preparing the properties for condemnation were greater than the $1,500125 allowed by respondent. This burden petitioners have not sustained. Foster testified with respect to going to the project and carrying cash and paying for certain items in cash but he did not testify as to the amounts so expended. The evidence is wholly insufficient to justify a conclusion that the amount of the expenditure was greater than the amount allowed by respondent. The remaining controversy involves an amount of $4,344 claimed as a deduction by Honolulu, the nature of which is unexplained in the evidence and an amount of $10,000 claimed as a deduction by Honolulu which represented an allocable portion of an amount of $20,301.50 of travel and entertainment expenses paid by the Foster partnership. The evidence does not show the nature of the travel and entertainment expenses paid by Foster & Sons which comprise the $20,301.50. We might attempt to determine whether any portion of the amounts paid as travel and entertainment expenses by Foster & Sons was properly chargeable to Honolulu if we knew the nature of these expenses. There is no evidence in the record as to the nature of the expenses. We are not warranted in considering that any portion of the $10,000 deduction claimed126 by Honolulu for such expenses was proper without any information as to the items that comprise the total expenses of which $10,000 was allocated to Honolulu. It is possible that of the total of $20,301.50 an amount of $10,000 was not such entertainment expenses as to constitute an ordinary and necessary business expense deduction for any of the Foster organizations. Since the burden of proof with respect to deductions claimed is on petitioners, we sustain respondent in his disallowance of the claimed deductions for travel and entertainment expense in the amount of the $4,344 for the fiscal year 1958 and $10,000 for the fiscal year 1959. Gain with Respect to the Condemnation of the Property of the Wherry Corporations Issue 6 That there was ultimately a gain from the condemnation of the properties owned by the Wherry corporations is clear from the facts and petitioners do not argue to the contrary. However, the time that such gain arose has a substantial effect on the tax liabilities of the various corporate petitioners because of the plan of liquidation adopted by the four Wherry corporations in August 1958 and the completion in August 1959 of that liquidation within a year after127 the plan was adopted. It is also necessary to determine whether any gain was realized prior to February 10, 1958. On that date the Wherry corporations ceased to be affiliates of Honolulu and therefore income received prior to February 10, 1958, is a part of the consolidated income for Honolulu and subsidiaries for the fiscal year ended June 30, 1958, while income received by the Wherry corporations after February 10, 1958, is taxable to them as separate corporations, and the resultant tax is a part of the liability of their stockholders as transferees to the extent of the value of the assets transferred to the stockholders. The facts which we have set forth show that each of the Wherry corporations had a principal balance due on its mortgage in excess of its adjusted basis in the properties condemned at the dates in 1957 when the United States filed the condemnation proceedings and notices of taking. If the filing of these suits in which each of the Wherry corporations shortly thereafter filed a notice of appearance in which no objection was made to the taking of the property, but only a demand for a jury trial as to just compensation, constituted a sale or other disposition of the128 properties whereby the Wherry corporations were relieved of their mortgage indebtedness, respondent is correct in his determination that each of the Wherry corporations received gain on the disposition of a capital asset to a person outside the affiliated group prior to February 10, 1958, and the capital gain so received is a part of the consolidated net income of the group for the fiscal year ended June 30, 1958. Where property is sold subject to a mortgage liability the amount received by the seller includes the amount of the mortgage to which the property was subject, even though the mortgage is not assumed by the purchaser. Crane v. Commissioner, 331 U.S. 1">331 U.S. 1 (1947). In accordance with this principle, had the properties been sold by the Wherry corporations to the United States, those corporations would have realized income to the extent that the mortgages to which the properties were subjected exceeded their bases in the properties even though the amount which they would obtain in excess of such mortgages could not be considered as sufficiently ascertained to determine the entire gain ultimately to be received. If the properties had been sold subject to the mortgages129 for only $1, the entire bases of the Wherry corporations in the properties would have been returned to them and the excess of the mortgage indebtednesses subject to which the properties were sold, would result in income to them, since in each instance "the 'amount realized' on the sale" included the amounts outstanding on the mortgages. Crane v. Commissioner, supra. Petitioners, however, argue that the condemnation proceedings under which the properties of the Wherry corporations were taken are more comparable to an involuntary conversion. Petitioners state that the liabilities of the Wherry corporations on the mortgages were unaffected by the transfer and all that the Wherry corporations received was a right to an award against which the mortgages might ultimately be offset. When the facts which we have set forth are considered in connection with the statutes under which the condemnations were made, petitioners' analysis is not supported by the evidence. Section 1594a(c)(2) of Title 42 of the United States Code which is a portion of the governing statute which authorized the acquisition by the United States of housing financed under the Wherry Act, provides that130 in order to have possession of the houses surrendered under a declaration of taking, the minimum deposit necessary to be made shall be an amount equal to the actual cost of the housing as certified by the sponsor or owner of the project to the FHA, reduced by the amount of the principal obligation of the mortgage on the project remaining outstanding. 19 Therefore, in order for the United States to obtain possession of the properties, which the facts show it did in 1957, it was necessary for the United States to guarantee that the amount to be paid for the project would be at least in the principal amount of the FHA mortgages outstanding. 131 Any reasonable interpretation of this statute and of the pleadings in the condemnation case and the judgment of the District Court that title to properties was in the United States is that petitioners were relieved of their mortgages upon the transfer of title to the properties to the United States "subject to the interest of" the mortgagees. All of these events occurred before the end of the calendar year 1957. 20Therefore, unless it is to be considered that in a condemnation, as distinguished from a sale, the amount of the mortgage is not a part of the "amount realized," then the Wherry132 corporations realized gain because of the excess of the mortgage liabilities on the properties transferred to the United States over their bases in the properties while they were affiliated and filing a consolidated return with Honolulu. In Hawaiian Gas Products v. Commissioner, 126 F. 2d 4 (C.A. 9, 1942), affirming 43 B.T.A. 655">43 B.T.A. 655 (1941), it was held that condemnation proceedings amounted to a sale for the purpose of the provisions relating to gains and losses on the sale of a capital asset and that the sale occurred at the time of the transfer of the property. The transfer of the property is when it passes at the time of taking determined under the law under which the condemnation occurs. Kieselbach v. Commissioner, 317 U.S. 399">317 U.S. 399 (1943). Under the law under which this condemnation proceeding was instituted the taking occurred upon the filing of the declaration and the deposit of some amount in excess of the mortgage liability on the property. Since we sustain respondent in his determination that the Wherry corporations realized capital gain during the year 1957 when their properties were taken by the United States, it is unnecessary to decide133 the date of the execution of the so-called three-party agreements with respect to the various mortgages. It follows from our determination that the gain was realized in the calendar year 1957, that this same gain was not realized by Ord and Monterey after February 11, 1958, even though certain of the signatures to the three-party agreements did not occur until after this date. It is not clear on what facts petitioners base their contention that the bases of the properties on the books of the Wherry corporations are not their bases for the purposes of a computation of gain on condemnation. Apparently, from the testimony of petitioners' accounting witness that the book figures correctly reflect the bases of the corporations in the properties except for "prepaid items," it is petitioners' position that the bases of the properties should be increased by the amount at the date of condemnation of the deposit in escrow by each of the Wherry corporations with the mortgagee. The burden is on petitioners to show error in respondent's determination and petitioners have totally failed to show that the amounts deposited in escrow were not returned to them by the mortgagees after the condemnation134 of the property. If petitioners' argument about bases is on any other ground, petitioners have not so stated. The loan agreements under which the projects were financed are not in evidence and nothing is in evidence to show what disposition was made of the escrow deposits with the mortgagees after title to the properties passed to the United States. We therefore cannot assume that the sums were not returned to the Wherry corporations prior to February 10, 1958. The three-party agreements indicate that these funds are to be repaid to the mortgagor. Petitioners object to these agreements on the ground that the Wherry corporations were not a party to them. However, we need not consider the indication from these agreements since petitioners have not proved that the escrow deposits were not in fact returned to them. The next issue with respect to the gain on the condemnation is whether the four Wherry corporations realized a taxable gain during their fiscal year ended June 30, 1959, because of the withdrawal during August and September of 1958 of amounts which had been deposited with the Court by the United States at the time of the filing of the declarations of taking and an amended135 declaration of taking. Petitioners apparently recognize that respondent is correct in his contention that these withdrawals constituted receipts with respect to the sale of the properties which would result in gain if they were in excess of basis. Petitioners' argument with respect to these withdrawals is first that since the properties were still subject to mortgages on which the Wherry corporations were liable, the withdrawals in August and September of 1958 were less than the bases of the Wherry corporations in the properties and therefore no gain was realized. Since we have held that upon the taking of the properties by the United States in 1957, the Wherry corporations realized gain to the extent that the principal liabilities on the mortgages exceeded their bases in the properties, it follows that the Wherry corporations each recovered its entire basis in the properties in 1957 and that the entire amount of the withdrawals in 1958 represented gain. Petitioners' next argument is that if gain was realized on the withdrawal of the deposits, it is not to be recognized for tax purposes under the provisions of section 337. 21 This section provides that if a corporation adopts a136 plan of complete liquidation on or after June 22, 1954, and within the 12-month period beginning with the date of the adoption of the plan, all of the assets of the corporation are distributed in complete liquidation, no gain or loss shall be recognized to that corporation from the sale or exchange by it of property within such 12-month period. The facts show that the Wherry corporations adopted a plan of complete liquidation on August 11, 1958, and distributed all of their assets and completed their liquidation on August 8, 1959, within a 12-month period. Therefore, the only provision of section 337 which respondent contends the Wherry corporations do not come within is the requirement that their properties be sold within the 12-month period after the adoption of the plan of liquidation. 137 This question has arisen in a number of cases. Our Court as well as other courts, has held that in determining the date of sale for the purpose of section 337 where a condemnation has taken place, the sale occurs when title passes in accordance with the law governing the condemnation proceeding, and if title passes on the date of the commencement of the condemnation suit, a corporation does not come within the nonrecognition-of-gain provisions under section 337 with respect to the sale if it adopts a plan of complete liquidation after the commencement of suit and passing of title. 44 West 3rd Street Corporation, 39 T.C. 809">39 T.C. 809 (1963), affirmed sub nom. Wendell v. Commissioner, 326 F. 2d 600 (C.A. 2, 1964); Dwight v. United States, 328 F. 2d 973 (C.A. 2, 1964); and Harriet Fibel, 44 T.C. 647">44 T.C. 647 (1965). These cases all involved condemnations under New York Law and concluded under that law that title vested and the sale occurred for the purposes of section 337(a) on the date the order of condemnation was entered. The condemnation in the instant case is under 40 U.S.C., section 258a22 which provides that a declaration138 of taking may be filed by the United States, and that upon the filing of such a declaration of taking, and the making of a deposit in Court to the use of the persons entitled thereto, "title to the said lands in fee simple absolute, or such less estate or interest therein as is specified in said declaration, shall vest in the United States of America, and said lands shall be deemed to be condemned and taken for the use of the United States, and the right to just compensation for the same shall vest in the persons entitled thereto; * ." This section clearly provides for the passing of title to the United States upon the filing of the declaration of taking and the deposit of moneys in the Court which, as we have stated heretofore, were deposited in accordance with the provisions of 40 U.S.C. 258 and 42 U.S.C. 1594a. Since the sale of the property occurred prior to the adoption on August 11, 1958, of139 a plan of complete liquidation by the Wherry corporations, the provisions of section 337(a) are not applicable with respect to Wherry corporations' properties condemned by the United States, and therefore these corporations did realize gain upon the withdrawal of the funds deposited by the United States in the District Court in which the condemnation proceedings were pending. 44 West 3rd Street Corporation, supra, and Harriet Fibel, supra. We therefore sustain respondent in his determination that the Wherry corporations each received a gain from the sale of the properties during their fiscal year ended June 30, 1959, because of the withdrawal of funds in August and September 1958 from the deposits in the District Courts. Claimed Deductions for Administrative Expenses Issue 7 Respondent disallowed a net amount of $325,000 of deductions claimed by Honolulu and subsidiaries as administrative expenses, finance fees, and interest expenses on the ground that they did not represent ordinary and necessary business expenses or an allowable deduction. The facts show that Foster personally negotiated for financing fees for two housing projects to be built by140 Honolulu in Honolulu, Hawaii. These projects were known as Harbor Heights and Foster Village. The evidence also shows that the financing which was arranged and obtained to enable Honolulu to proceed with these two projects was in such an amount that a $80,000 fee for services in arranging the financing was a reasonable amount in an arm's-length transaction between unrelated parties. Two of the sums, one in the amount of $50,000 and one in the amount of $30,000, were paid by Honolulu to Foster for his services as an officer of the corporation arranging for the availability of financing for the property and are deductible by Honolulu as ordinary and necessary business expenses unless they should be considered as a part of the cost of the projects. Although the evidence is not completely clear it shows to our satisfaction that the services were in connection with the general financial problems of Honolulu and therefore a business expense and not a capital expenditure. A portion of the remaining $245,000 of deductions was payments to Foster as salary. It is not completely clear from the record as to the payments that were for salary but we are satisfied that the two items of administrative141 expense, one charged to Foster Development and one charged to Foster Homes totaling $180,000, represent a payment of salary of $105,000 to Foster and a $75,000 payment to the partnership, Foster & Sons. The payment of $105,000 to Foster was charged to Foster Development and deducted by it. This was the company that developed Foster Village for Honolulu, a project consisting of 525 houses. Because of the size of this project and the necessity for obtaining interim financing for its construction as well as permanent financing, we consider the record to be sufficient to show that the $105,000 was a reasonable salary payment to Foster and that this amount is deductible by Foster Development as an ordinary and necessary business expense. We therefore sustain petitioners' position that deductions to the extent of $185,000 of the claimed $325,000 disallowed by respondent are properly allowable. There is nothing in the record to show the basis of the payment of the $75,000 to Foster & Sons or what was included in the $142,351.07 for other corporate expenses. These amounts may have been capital expenditures or for other reasons not deductible expenses. We therefore sustain respondent in the142 disallowance of these deductions because of petitioners' failure to show error in that disallowance. The other item involved is an interest expense deduction by Foster Homes of $22,648.02. The evidence shows that Foster personally advanced some funds in connection with the development of Harbor Heights and Foster Village. The evidence further shows that $250,000 of the $325,000 of disallowed expense deductions represented amounts paid to Foster and $75,000 represented amounts paid to the partnership, Foster & Sons. It therefore appears that the $22,648.93 was paid to Foster and reported by him as income on his personal income tax return as were the amounts of the other payments to him by the various corporations. Certainly Foster is entitled to receive interest from the corporations on personal funds advanced. Although the proof is not as clear as it might be, we conclude that the interest expense was paid to Foster in connection with advancements of funds and that the funds were advanced in connection with the business activities of Foster Homes in the construction of houses in Foster Village and therefore the $22,648.02 interest payment is a proper deduction by Foster Homes in143 the computation of its taxable income. Whether Honolulu Had a Gain from Distributions in Liquidation by the Wherry Corporations Issue 8 Respondent takes the position that since amounts of $463,226 and $318,827 were withdrawn from the District Court by Ord and Monterey, respectively, and the amounts of $171,500 and $166,500 were withdrawn from the District Court by Biggs and El Paso, respectively, pursuant to the orders of those courts permitting the withdrawal by those corporations, the amounts became the property of the Wherry corporations and were distributed by those corporations to Honolulu and the other stockholders of the Wherry corporations as a liquidating dividend. The facts show that all of the amounts withdrawn totaling $1,120,053 were placed in Honolulu's bank account. The fact alone would not necessarily show that the amounts were distributed to the stockholders of the Wherry corporations, since it apparently was not uncommon for funds of one of the related group of corporations to be placed in the bank account of another related corporation. However, the entry of September 5, 1958, on Honolulu's books of a credit of $888,576.13 to "Gain on Sale of Assets" and144 the making of appropriate credit on Honolulu's books to Foster and his sons, the other stockholders in the Wherry corporations, indicate that a distribution of the amount of $888,576.13 was made by the Wherry corporations to Honolulu in the fiscal year ended June 30, 1959. Shortly prior to the entry of the $888,576.13 on the books of Honolulu as a "Gain on Sale of Assets," the Wherry corporations had adopted plans of liquidation. Therefore the distributions were distributions on liquidation. The record shows that all of the assets of each of the Wherry corporations were distributed to its shareholders before August 8, 1959, when the liquidations were completed. Petitioners apparently are not contending that the distributions of $888,576.13 were not made to Honolulu by the Wherry corporations during the year ended June 30, 1959, but apparently are contending that the bases of the assets of the Wherry corporations with respect to which the amounts were distributed exceeded the amounts of the distributions. We have previously held that each of the Wherry corporations recovered the full basis of its assets prior to the close of the calendar year 1957 and this would dispose of this145 argument of petitioners were it relevant. However, the relevant fact with respect to whether gain is realized on a distribution to stockholders in liquidation is not the basis of the assets of the distributing corporation but the basis of the stockholder to which the distribution is made in the stock of the distributing corporation. We have previously discussed the fact of the redemptions of the class A common stock of Ord and Monterey so that it is apparent Honolulu had a basis of zero in the class A common stock of each of those two corporations at the date of distribution of the funds withdrawn from the District Court in 1958. There is nothing in the record to show the bases of Honolulu in the class A common stock of Biggs and El Paso or any adequate proof of its basis in the class B stock of any of the corporations. In connection with the allocation between class A and class B stock of losses availed of by Monterey which would not have been available to it except for the filing of a consolidated return, we put a basis of $15,000 on the class B stock of Monterey from a balance sheet figure appearing in the record. We took this balance sheet figure because of the fact that respondent146 had the burden of proof and had not shown that this amount did not represent Honolulu's basis in the stock. However, in the instant case respondent determined that the full $888,576.13 was taxable to Honolulu as a liquidating distribution and therefore the burden of showing that a lesser amount is taxable to Honolulu is on petitioners. Section 331 provides that amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and respondent has in his notice of deficiency so treated the distribution of $888,576.13 to Honolulu by treating the amount as a capital gain to Honolulu. Petitioners in their reply brief, make the statement that "Honolulu Corp. received the cash either as a liquidating dividend or as a collection on the chose-in-action which Honolulu Corp. was to receive as a result of the liquidation," and that if the amount were received as a liquidating dividend, it "is not the gross assets received, but the net amount determined by the liabilities to which the assets received may be subject." Petitioners argue that if the cash was received as a collection on a claim against the United States, Honolulu's basis in147 the claim exceeded the cash receipts. The evidence fails to show that any chose-in-action against the United States had been distributed by the Wherry corporations to Honolulu prior to the cash distribution here involved. Therefore the only argument made by petitioners against respondent's treatment of the $888,576.13 as having been received as a liquidating dividend which we need to consider further is petitioners' contention that the cash received was subject to liabilities so that the net amount should be determined as having been received. A comparison of the liabilities shown on the balance sheet of the Wherry corporations as of June 30, 1958 and June 30, 1959, indicates that the distribution made in August 1958 was not subject to any liabilities. At that time the claims against the United States are not shown to have been distributed and it is not shown that such claims would not be of sufficient value to discharge any liabilities that the Wherry corporations had. If at some later date it were determined that some liability did exist which Honolulu was required to pay, the amount would be a capital loss to Honolulu in a later year. Arrowsmith v. Commissioner, 344 U.S. 6">344 U.S. 6 (1952).148 If petitioners had in mind some liability of Honolulu as a transferee for income taxes of the Wherry corporations, the amounts would not be proper reductions of the distributions but any adjustment would be made in Honolulu's income in the year that the liability for such taxes is determined or paid. James Armour, Inc., 43 T.C. 295">43 T.C. 295, 312 (1964). We therefore sustain respondent in his determination that the entire $888,576.13 constituted a capital gain to Honolulu in its fiscal year ended June 30, 1959. Transferee Liability Issue 9 It is not clear that petitioners contest the determination of transferee liabilities against Honolulu, Foster, and his sons except insofar as they contest the liabilities determined against the transferor corporations. The facts we have set forth and our ultimate facts on this issue dispose of the extent of the liability of Honolulu, Foster, and each of Foster's three sons as transferees of the Wherry corporations. If there is an issue in respect to the transferee liability, we hold that the extent of the liability of each of the transferees is as set forth in our ultimate finding on this issue. Decisions will be entered under Rule 50. 149 Footnotes1. Proceedings of the following petitioners are consolidated herewith: T. Jack Foster, Docket Nos. 1005-64, 1026-64, and 1028-64; T. Jack Foster, Jr., Docket Nos. 1029-64, 1035-64, 1404-64, and 1042-64; John R. Foster, Docket Nos. 1025-64, 1030-64, 1034-64, and 1039-64; Richard H. Foster, Docket Nos. 1027-64, 1036-64, 1037-64, and 1041-64; and Likins-Foster Honolulu Corp., Docket Nos. 1031-64, 1032-64, 1033-64, 1038-64, and 1088-64.↩2. Likins-Foster Ord Corporation, Likins-Foster Monterey Corporation, Likins-Foster Biggs Corporation, and Likins-Foster El Paso Corporation each ceased to be a member of the consolidated group as of February 10, 1958, and were therefore not included in the consolidation for the remainder of the fiscal year ended June 30, 1958, or for any portion of the fiscal year ended June 30, 1959. The first year for which Central Development Company, Ltd., was a member of the consolidation was the fiscal year ended June 30, 1958, and it continued to be a member of the consolidation through the fiscal year ended June 30, 1959. All other subsidiaries were members of the consolidation throughout the entire period covered by the fiscal years here in issue.↩3. All references are to the Internal Revenue Code of 1954 unless otherwise stated.↩4. We will use the term "separate net operating loss carryover" to refer to carryover of affiliates from years for which separate returns were filed and the terms "separate income" or "separate net income" to refer to the income of affiliates computed prior to the combining of the income and losses of all members of the affiliated group for the computation of consolidated net income.↩. It is stipulated that 421 buildings were sold and the variance between the 411 buildings sold and the stipulated figure is unexplained in the record.↩. This loss carryover was as of the close of the separate fiscal year of Biggs Rental Co., ended August 31, 1956.↩. Indicates that the separate net operating loss available to the corporation was larger than its net income.↩. Respondent has adjusted the reported loss to ($78,664).↩. The calendar years ending December 31 are in the fiscal years of the corporation ending June 30 of the following year.↩. Day of month illegible on exhibit.↩5. Fee simple estates are usually not obtainable in Hawaii due to the concentration of land holdings in large estates. The typical form of acquiring property for private use is by long-term lease.↩. It is stipulated that Honolulu entered on its books the amount of $888,576.13 to represent its 79 1/3 percent share of the amounts withdrawn from court. However, the sum of 79 1/3 percent of each of the four amounts withdrawn is $888,575.39 (79 1/3 percent of the total amount withdrawn ($1,120,053) is $888,575.38).↩. This figure represents three amounts: ↩Additional just compensation awarded by jury$323,947.00Agreed amount due for personal property49,534.58Mortgage insurance refund38,647.36$412,128.946. SEC. 482. ALLOCATION OF INCOME AND DEDUCTIONS AMONG TAXPAYERS. In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. Sec. 1.482-1(b)(2), Income Tax Regs.* * * If a controlled taxpayer makes a separate return, the determination is of its true separate taxable income. If a controlled taxpayer is a party to a consolidated return, the true consolidated taxable income of the affiliated group and the true separate taxable income of the controlled taxpayer are determined consistently with the principles of a consolidated return.↩7. Net incomeCollectionsLoss carry-for fiscalon sales -overyear 19571957Ord$ 81,875$ 85,753$ 95,314Monterey123,13986,093142,455Biggs106,418106,344110,098El Paso114,945114,580124,974 Without the benefit of the income from the sales of the Topeka houses they would have had no net taxable income.↩8. Sec. 1.1502-31(b)(3)↩ [Income Tax Regs.] Limitation on net operating loss carryovers and carrybacks from separate return years. In no case shall there be included in the consolidated net operating loss deduction for the taxable year as consolidated net operating loss carryovers or carrybacks under paragraphs * * * (relating to net operating losses sustained by a corporation in years for which separate returns were filed, or for which such corporation joined in a consolidated return filed by another affiliated group), an amount exceeding in the aggregate the taxable income of such corporation included in the computation of the consolidated taxable income for the taxable year decreased by its deductions under sections 181, 243, 244, 245, 247 and 922 (and in the case of a member of an affiliated group to which the consolidated section 175 deduction is applicable, the section 175 deduction), increased by its separate net capital gain, and increased or decreased, as the case may be, with respect to its separate gains and losses from involuntary conversions subject to the provisions of section 1231, and from sales or exchanges of property subject to the provisions of section 1231 * * * 9. SEC. 1501. [I.R.C. 1954] PRIVILEGE TO FILE CONSOLIDATED RETURNS. An affiliated group of corporations shall, subject to the provisions of this chapter, have the privilege of making a consolidated return * * . The making of a consolidated return shall be upon the condition that all corporations which at any time during the taxable year have been members of the affiliated group consent to all the consolidated return regulations prescribed under section 1502 prior to the last day prescribed by law for the filing of such return. The making of a consolidated return shall be considered as such consent. * ↩10. Substantial changes have been made or proposed in consolidated regulations for years after 1965, but, of course, here we are not concerned with these changes.↩11. Under our holding with respect to other issues, the amount of the consolidated net income prior to the use of any net operating loss carryovers will probably be changed from the income as reported by petitioners but we will use the reported income as illustrative of this issue.↩12. Sec. 1.1502-31(b)(2)(ii), Income Tax Regs.(ii) Dividends received. In the computation of the dividends received, there shall be excluded all dividends received from other members of the affiliated group.↩13. SEC. 316, I.R.C. 1954. DIVIDEND DEFINED. (a) General Rule. - For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders - (1) out of its earnings and profits accumulated after February 28, 1913, or (2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made. Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.↩14. SEC. 301(c) Amount Taxable. - In the case of a distribution to which subsection (a) applies - (1) Amount constituting dividend. - That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income. (2) Amount applied against basis. - That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. (3) Amount in excess of basis. - (A) In general. - Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property. (B) Distributions out of increase in value accrued before March 1, 1913. - That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value accrued before March 1, 1913, shall be exempt from tax.↩15. SEC. 1.1502-31(b) Computations. In the case of affiliated corporations which make, or are required to make, a consolidated return, and except as otherwise provided in the regulations under section 1502: (1) Taxable income. The taxable income of each corporation shall be computed in accordance with the provisions covering the determination of taxable income of separate corporations, except: * (2) Other computations on separate basis. The various other computations required by the regulations under section 1502 to be made by the several affiliated corporations shall be made in the case of each such corporation in the same manner and under the same conditions as if a separate return were to be filed, but with the following exceptions: * (iii) Capital gains and losses. Capital gains and losses, short-term capital gains and losses, long-term capital gains and losses, and the additional capital loss deduction authorized by section 832(c)(5) shall be determined without regard to: (a) Gains or losses arising in intercompany transactions (other than gains described in section 357(c) and gains recognized to the distributing corporation pursuant to section 311(c) by reason of distributions by one member of the group to another member of the group, * ↩16. Sec. 1.1502-37 Liquidations; recognition of gain or loss. (a) During consolidated return period. (1) Gain or loss shall not be recognized upon a distribution during a consolidated return period, by a member of an affiliated group to another member of such group, in cancellation or redemption of all or any portion of its stock, except - (i) Where such distribution is in complete liquidation and redemption of all of its stock (whether in one distribution or a series) and of its bonds and other indebtedness, if any, and falls without the provisions of section 332, and is the result of a bona fide termination of the business and operations of such member of the group, in which case the adjustments specified in §§ 1.1502-34 and 1.1502-35 shall be made, and § 1.1502-36 shall be applicable; (ii) Where such a distribution without the provisions of section 332 is one made in cash in an amount in excess of the adjusted basis of the stock, and bonds and other indebtedness, in which case gain shall be recognized to the extent of such excess; or * ↩17. Sec. 1.1502-33 Gain or loss from sale of stock, or bonds or other obligations. Gain or loss from the sale or other disposition (whether or not during a consolidated return period), by a corporation which during any period of time has been a member of an affiliated group which makes or is required to make a consolidated return, of any share of stock or any bond or other obligation issued or incurred by another corporation which during any part of such period was a member of the same group, shall be determined, and the extent to which such gain or loss shall be recognized and shall be taken into account shall also be determined, in the same manner, to the same extent, and upon the same conditions as though such corporations had never been affiliated except - (a) In the case of a disposition (by sale, or in complete or partial liquidation not involving cash in an amount in excess of the adjusted basis of both the stock and the bonds and other indebtedness liquidated, or otherwise) during a consolidated return period to another member of the group ( §§ 1.1502-31 and 1.1502-37); * ↩18. Respondent's computation is as follows: AdjustmentReduction ofunder Sec.Extentadjust-1.1502-34separate-ly availablement due(b)(2)toFiscal yearMonterey asto consol-IncomeendedTaxable incomenet loss de-idatedTaxJune 30MontereyConsolidatedductionlossRegs.1954($($224,615.300$23,729.03 ($ 148.36)23,877.39))1955((055,572.06 ( 23,091.93)78,663.99)248,820.96)1956(449,799.8100( 72,090.25)72,090.25)($174,631.6$79,301.09($95,330.54)3)a1 Monterey's loss / Total losses of all corporations having losses X Consolidated loss↩19. 42 U.S.C. 1594a(c)(2) provides in part as follows: In any condemnation proceedings instituted to acquire any such housing, or interest therein, the court shall not order the party in possession to surrender possession in advance of final judgment unless a declaration of taking has been filed, and a deposit of the amount estimated to be just compensation has been made, under section 258a↩ of Title 40. The amount of such deposit for the purpose of this section shall not in any case be less than an amount equal to the actual cost of the housing (not including the value of any improvements installed or constructed with appropriated funds) as certified by the sponsor or owner of the project to the Federal Housing Commissioner pursuant to any statute or any regulation issued by the Federal Housing Commissioner, reduced by the amount of the principal obligation of the mortgage outstanding at the time possession is surrendered, but any such deposit shall not include any excess mortgage proceeds or "windfalls", kickbacks and rebates received in connection with the construction of said housing as determined by the Department of Defense, or any other Federal agency. * *20. This identical question was passed upon by this Court in Moses Lake Homes, Inc., T.C. Memo. 1964-289. There we held that, "It is nevertheless clear that as a result of the involuntary disposition of their leasehold interest, the petitioners on March 1, 1958, realized the amount of the total mortgages outstanding, subject to which their leasehold estates on that date were transferred to the United States Air Force. Crane v. Commissioner, 331 U.S. 1">331 U.S. 1; Parker v. Delaney, 186 F.2d 455">186 F. 2d 455: Wala Garage v. United States, 163 F. Supp. 379">163 F. Supp. 379↩."21. SEC. 337. GAIN OR LOSS ON SALES OR EXCHANGES IN CONNECTION WITH CERTAIN LIQUIDATIONS. (a) General Rule. - If - (1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and (2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.↩22. This same section of the United States Code was involved in Covered Wagon, Inc., T.C. Memo. 1965-79↩, in which we held that the "sale" occurred on the date of the filing of the declaration of taking for the purposes of sec. 337(a).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620946/	Central Station Signals, Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentCentral Station Signals, Inc. v. CommissionerDocket No. 13373United States Tax Court10 T.C. 1015; 1948 U.S. Tax Ct. LEXIS 166; June 7, 1948, Promulgated 166 Decision will be entered for the respondent. Petitioner entered into an agreement with a factor under the terms of which it agreed to assign to the factor contracts calling for the operation and maintenance of signaling systems for five years, in return for an advance of face value thereof, less a discount factor of 1.35, representing the charge for financing the contract. The agreement also provided that, when the last payment was received by the factor on any contract, it would be reassigned to petitioner, and petitioner guaranteed that amounts due annually from subscribers would be paid. As each subscriber made its annual payment to factor, petitioner charged off such portion of the contingent liability as was erased by the subscriber's payment, and an aliquot part of the total finance charge was charged as interest expense for the current year. Held:(1) Contingent liability of petitioner to pay factor face amount of the contracts assigned is indebtedness "evidenced by a * * mortgage" and is "borrowed capital," as defined in section 719, I. R. C.(2) Discount or finance charges deducted from the face amount of contracts assigned to factor in connection with advances167 made to petitioner are interest charges, and aliquot portion of such charges written off by petitioner in 1943, is interest on borrowed invested capital within the purview of section 711 (a) (2) (B), I. R. C.(3) The provisions of sections 717 and 719, I. R. C., with respect to the inclusion in invested capital of "borrowed invested capital" (50 per cent of borrowed capital) are mandatory, and this Court is without authority to permit a corporation which has elected to compute its excess profits tax credit on the invested capital basis to exclude from invested capital its "borrowed invested capital." E. S. Schweig, Esq., for the petitioner.Whitfield J. Collin, Esq., for the 168 respondent. Harlan, Judge. * Kern, J., dissenting. Murdock and Disney, JJ., agree with this dissent.HARLAN 1016 OPINION.The respondent determined deficiencies in the income and excess profits taxes of petitioner for the year 1942 in the amounts of $ 494.77 and $ 1,010.54, respectively. Certain of the adjustments made by the respondent are not contested by the petitioner.The questions presented are:(1) Did the Commissioner err in including as borrowed invested capital, in the computation of petitioner's excess profits tax credit, certain contingent indebtedness which arose out of transactions involving the assignment of certain of petitioner's contracts with its subscribers?(2) In making the adjustment for interest on petitioner's borrowed invested capital as provided by section 711 (a) (2) (B) of the Internal Revenue Code, did the Commissioner err in classifying as interest certain charges arising out of the transactions involving the assignment of certain of petitioner's contracts with subscribers?(3) Did the Commissioner err in determining that it was mandatory that the petitioner, in 169 computing its adjusted excess profits tax net income, include certain of its "alleged" indebtedness as a part of its borrowed invested capital, when, after giving effect to the adjustment for the "alleged interest" or finance factor applicable thereto, the inclusion of such indebtedness would result in a tax disadvantage to the petitioner?We find the facts to be as stipulated. Petitioner is a New York corporation, with its principal place of business located in New York City. Its income and excess profits tax return for the year 1942 was filed with the collector of internal revenue for the third district of New York.The petitioner was organized on or about December 10, 1936 (and merged with the Central Alarm Co. on or about July 7, 1938).Since its inception, the petitioner has been consistently engaged in the business of installing, maintaining, and operating certain signaling (sprinkler and fire alarm) apparatus and rendering services in connection therewith to its customers or subscribers.The petitioner's relationship with its subscribers was generally covered by uniform printed contracts calling for the installation and maintenance of a signaling system necessary to relay 170 signals to an operating central signal office maintained by the petitioner, for which a subscriber or customer agreed to pay, as rent for the system and service, a stated annual sum in advance for a period of five years.On or about October 2, 1937, petitioner entered into an agreement with Phillips & Co. of Chicago, Illinois (hereinafter referred to as Phillips) providing for the assignment by the petitioner to Phillips of 1017 certain of its subscribers' contracts. Phillips agreed to pay the petitioner the face amount of the contract, less a discount factor of 1.35, representing the finance charge. This finance charge, computed on the amount actually advanced by Phillips was in the amount of 7 per cent per payment to cover five payments for four years, which amounted to an average net minimum charge of approximately 17 per cent per annum on the balance due under each contract.The agreement between petitioner and Phillips provided that all payments under the assigned contracts were to be made by subscribers to Phillips; that if, at any time during the period of lease, petitioner desired to repurchase one or more of the assigned contracts, Phillips would reassign such contracts171 upon receipt of the amount of the unpaid payments, allowing a discount on all such unpaid payments at the rate of 8 per cent per annum; that petitioner should guarantee the prompt payment of all amounts due under the contracts; that, in the event of a default for a period in excess of 30 days or termination of a contract for any reason, petitioner would pay Phillips all payments then due in full, and all future payments to become due, discounted at the rate of 8 per cent per annum; and that, when the last payment had been received on any contract, Phillips would reassign the contract to petitioner and so notify the subscriber. The agreement also provided that Phillips might, in its uncontrolled discretion, pledge, hypothecate, sell, or otherwise deal with the contracts which petitioner from time to time sold or assigned to it.Pursuant to the agreement, the petitioner assigned a number of the subscribers' contracts to Phillips, and received from that company the face value of such contracts less the discount factor of 1.35. Such assignments were evidenced by written instruments which stated that petitioner, for value received, "hereby sells, assigns, sets over, and transfers to 172 Phillips * * * all its right, title and interest in and to that certain contract" between petitioner and the subscriber, and they contained the warrants of petitioner that the apparatus described in the contract had been installed; that it would continue to service and operate such apparatus during the term of the assignments; and that the sums unpaid under the contract would be paid to the assignee or its successors or assigns.Upon the completion of such transactions with Phillips and upon receipt of the proceeds by petitioner, petitioner caused to be reflected on its books the amount so received, plus the discount or cost factor, which together remained as a contingent liability of the petitioner to Phillips, since under the basic agreement petitioner guaranteed payment by subscriber as long as subscriber's obligations remained unpaid. As each subscriber made its annual payment to Phillips, petitioner would charge off such portion of the contingent liability as was erased 1018 by subscriber's payment, and the aliquot part of the discount or cost factor was charged to profit and loss as an expense for the then current year.The 7 per cent per payment was not identified on 173 the books of the petitioner as a discount factor or as a loss from the sale and assignment of its subscribers' contracts, but such discount factor was included in petitioner's regular interest expense account.The pertinent provisions of the Internal Revenue Code are set forth in the margin. 1174 The petitioner elected to compute its excess profits tax credit under the invested capital method.The first contention of petitioner is that it had no "outstanding indebtedness" as of the beginning of any day in the year 1942, due Phillips, and that under the terms of the written agreement it could 1019 not be indebted to that company until one or more of its customers or subscribers, whose contracts were "sold and assigned" defaulted in payment and such payment remained in default for a period of thirty days. Petitioner urges that, since no customer whose contract had been assigned to Phillips had defaulted in payment during the year under review, no outstanding indebtedness in connection with the agreement with Phillips had been created.The respondent contends that, if the basic agreement between Phillips and petitioner and the actual assignment of the contracts are construed together, it is clear that the accounts were not in fact sold to or purchased by Phillips, but were assigned to Phillips solely for the purpose of securing the amount advanced to petitioner; that petitioner did not divest itself of all interest in the contracts, since the agreement provided for the175 reassignment thereof to petitioner when the amounts due Phillips had been paid; that the transactions between Phillips and petitioner thus in substance amounted to a mortgage of petitioner's contracts to secure Phillips' advances to petitioner, and, therefore, petitioner's indebtedness to Phillips must be considered "borrowed capital," since it was evidenced by a mortgage and thus qualifies under the definition contained in section 719 (a) (1), supra.In support of his contention, the respondent cites and relies upon Brewster Shirt Corporation v. Commissioner (C. C. A., 2d Cir., 1947), 159 Fed. (2d) 227. In that case Brewster, in order to obtain sufficient capital for its business, entered into a written agreement with Mills Factors Corporation in which it agreed to assign as collateral security its accounts receivable to the factor and the latter agreed to advance 90 per cent of the face value of the accounts and to pay the balance, less a stipulated charge of 3/4 of 1 per cent per month, upon payment of the assigned accounts. The agreement provided that "the Factor will purchase said accounts receivable subject to the terms and conditions 176 * * * set forth, at their net face value, less trade discounts and commissions," and Brewster agreed to repurchase at face value accounts which were not paid at maturity and assumed all credit risks with regard to the accounts. The Circuit Court held that the amounts advanced to the petitioner constituted borrowed invested capital, on the ground that the indebtedness was evidenced by instruments which constituted a "mortgage," and, among other things, said:It is clear that as soon as accounts were assigned and advances made thereon the agreement and assignments involved security transactions which in law constituted a mortgage. What legally is a mortgage is a matter of substance and not of mere form. * * ** * * ** * * It made no difference that Article "First" of the agreement provided that the Factor should "purchase said accounts subject to the terms and conditions hereinafter set forth, at their net face value, less trade discounts and commissions" for the advances were in fact loans, the assigned accounts were 1020 collateral security by the terms of the agreement, and repayment of the advances was guaranteed by the borrower. Home Bond Co. v. McChesney, 239 U.S. 568">239 U.S. 568, 36 S. Ct. 170">36 S. Ct. 170, 60 L. Ed. 444">60 L. Ed. 444.177 Petitioner attempts to distinguish the cited case from the instant proceeding and points to the provisions in the agreement in the Brewster case that the assignment and sale of the taxpayer's accounts receivable were made as "collateral security" for moneys advanced; that if at the termination of the agreement money was owed by Brewster to the factor, and Brewster did not pay it upon request, the factor might sell any collateral held by it at public sale, with ten days' notice to Brewster; and that Brewster was to continue to pay interest for "all additional time taken by its customers for the payment of their bills, provided such interest is not paid by customer."These provisions do not require a different conclusion in the instant proceeding from that reached in the Brewster case. In both proceedings there was an assignment of accounts receivable to a factor as security for the payment of advances; payment of these accounts was guaranteed by the assignor; and in both agreements words were used indicating either a "purchase" of the accounts by the factor or a "sale" by the assignor. It is true that petitioner was not required to make any payment of interest where additional178 time was taken by its customers, but its assignments nevertheless "involved security transactions which in law constituted a mortgage" under the rationale of the decision of the Circuit Court of Appeals for the Second Circuit in the Brewster case. Following that decision, we hold that the indebtedness of the petitioner to Phillips constituted borrowed capital as defined in section 719 (a) (1), supra.The petitioner cites and relies upon Consolidated Goldacres Co. v. Commissioner (C. C. A., 10th Cir.), 165 Fed. (2d) 542. In that case the Circuit Court held that a conditional sales contract obligating taxpayer to pay monthly installments contingent upon amount of ore milled at plant installed by a creditor on property of taxpayer was not a "mortgage" within provisions of the excess profits tax statute allowing credit in the amount of outstanding indebtedness evidenced by "mortgage." In the course of its opinion the court distinguished the facts before it from those in the Brewster proceeding.Petitioner's second contention is that the "cost" or "discount" or "finance factor expense" charges incurred by it in connection with the assignment179 of its subscribers' contracts to Phillips were not interest charges, and that the aliquot portion of such charges written off by it in 1942, while being properly deductible as an expense under section 23 (b), was not interest so as to come within the purview of section 711 (a) (2) (B) of the code.Section 711 (a) (2) (B) provides that if the excess profits credit is 1021 computed under the invested capital method the deduction for interest shall be reduced by an amount equal to 50 per cent of so much of such interest as represents interest on the indebtedness included in the daily amounts of borrowed capital determined under section 719 (a).As has been previously mentioned, when the petitioner assigned one of its contracts to Phillips, the latter did not advance to petitioner the full face value of the contract, but the face value (or such lesser amount as might have been agreed upon) less a discount factor of 1.35. Thus, if the petitioner assigned the contract of one of its subscribers providing for the payment of $ 1,000 a year for five years, Phillips would advance to the petitioner $ 3,703.70 ($ 5,000 divided by 1.35). The balance, $ 1,296.30, was the finance charge imposed180 by Phillips for financing the contract. This charge was equal to five times 7 per cent of $ 3,703.70, the amount advanced to petitioner.The petitioner would enter on its books the amount received from Phillips, plus the finance charge, as a contingent liability to Phillips. The annual payment of $ 1,000 would be made by the subscriber direct to Phillips, and as each payment was made petitioner would reduce the contingent liability by the amount of the payment, at the same time charging off an aliquot part of the total finance charge as an interest expense for the year of payment. Thus, as each $ 1,000 payment was made, the petitioner would charge off as interest expense $ 259.26, or 7 per cent of the total amount originally advanced.Petitioner's argument in support of its contention is that nowhere in the agreement between it and Phillips, or in the instruments of assignment, is there any mention of interest; and that while the "discount factor" or "finance cost" was an expense, properly deductible under section 23 (b) from gross income, it was merely the result of a bargain and sale transaction and similar to the cost or expense incurred in connection with the sale of a negotiable181 instrument or any other chattel.The fact that the amount charged off as "interest expense" was not denominated interest in the agreement or assignments is immaterial if it was in fact an "amount which one has contracted to pay for the use of borrowed money" ( Old Colony Railroad Co. v. Commissioner, 284 U.S. 552">284 U.S. 552, 560) or "compensation for the use or forbearance of money." ( Deputy v. duPont, 308 U.S. 488">308 U.S. 488, 498.) Petitioner did not treat these amounts on its books as a cost or expense incurred in connection with the sale of a negotiable instrument or other chattel. It included them in its regular interest expense account, and we think properly so, because the record indicates they were amounts which it contracted to pay for the use of borrowed money. They were charged off ratably as its liability to Phillips was reduced. Our conclusion is that the respondent did not err in treating them as interest under 1022 section 711 (a) (2) (B), for the purpose of adjusting normal tax net income by adding to it 50 per cent of the interest on borrowed capital.The remaining contention of petitioner is that, as a matter182 of law and equity, it is not mandatory upon it to include for the purpose of determining its excess profits tax credit certain alleged indebtedness as borrowed invested capital within the purview of sections 717 and 719, if to do so, after giving effect to the alleged interest deduction applicable therein as provided in section 711 (a) (2) (B) of the code, would result in a penalty or minus excess profits credit.This contention is unusual, for ordinarily the taxpayer is urging that borrowed capital is includible in invested capital and the Commissioner is contending that it is not. Cf. Consolidated Goldacres Co. v. Commissioner, supra, and Brewster Shirt Corporation v. Commissioner, supra. Petitioner does not want to include the liability to Phillips as part of its borrowed capital because, if it does, the only benefit it will receive will be the inclusion of 8 per cent of the amount of one-half of this borrowed capital in its excess profits credit, whereas under section 711 (a) (2) (B) it will have to restore to income interest charges in excess of that amount. The net result, therefore, of the inclusion of 183 the Phillips indebtedness in invested capital will be that petitioner will have to pay a greater excess profits tax than it would pay if it is excluded.The respondent contends that the petitioner, having elected to compute its excess profits tax credit on the invested capital basis, is required by sections 717 and 719 of the code to include all of its borrowed invested capital (50 per cent of its borrowed capital) in computing the amount of its invested capital. He argues that these sections do not provide that the borrowed invested capital may be included in the invested capital, but provide that it shall be included, and that the use of the word "shall" makes mandatory the inclusion of all borrowed invested capital. Respondent also points out that the reports of the Senate Finance Committee and the House Ways and Means Committee on the Second Revenue Act of 1940 nowhere indicate that the inclusion of borrowed capital was to be at the discretion of the taxpayer; that the House bill originally provided for the inclusion of a sliding percentage of borrowed capital in invested capital, but this provision was amended in the Senate so a straight 50 per cent of borrowed capital184 was to be included; and that, in commenting on the amendment, the Senate Finance Committee said:Under the bill as reported by your committee all borrowed capital, as defined in the House bill, is includible in invested capital at 50 per cent. [Italics supplied.]In support of its contention the petitioner urges that the use of the word "shall" in sections 717 and 719 does not make mandatory 1023 the inclusion of all borrowed invested capital; that this word should be interpreted to mean "may"; that Congress was not thinking in terms of imposing additional hardship upon the taxpayer when it enacted these sections; and that if a corporate taxpayer which has elected to compute its excess profits tax on the invested capital method (either because it was not in existence in base years, or because it did not have any earnings during those years) is compelled to determine its excess profits tax credit by including in its borrowed invested capital all indebtedness, regardless of the rate of interest charged, the net result would be to impose upon such a taxpayer a special tax over and above that which Congress intended to impose."There are cases in which words of a statute, 185 which are generally regarded as mandatory, are nevertheless given a directory or permissive meaning, in order to give effect to the legislative intent." 50 Am. Jur., sec. 32, p. 53. This is not such a case. In sections 714 to 719, inclusive, Congress has prescribed what is to be included in invested capital by a corporation electing to base its excess profits credit on invested capital. It has provided that the excess profits credit based on invested capital shall be the sum of the corporation's "equity invested capital" and its "borrowed invested capital" and it has defined both of these terms. The language used is mandatory and not permissive, and this Court is without authority to permit the exclusion of "borrowed invested capital," even though it may be, as petitioner urges, that Congress did not foresee that its inclusion might, as in the instant proceeding, result in a greater excess profits tax than would have resulted had it been excluded. "In sum we cannot sacrifice the 'plain, obvious and rational meaning' of the statute even for 'the exigency of a hard case.'" Deputy v. du Pont, 308 U.S. 488">308 U.S. 488, 498. Cf. Crossett Western Co. v. Commissioner, 155 Fed. (2d) 433;186 certiorari denied, 329 U.S. 729">329 U.S. 729. We have no alternative but to follow the statute, and we therefore hold that petitioner's "borrowed invested capital" as well as its "equity invested capital" must be included in determining its total invested capital.Decision will be entered for the respondent. KERN Kern, J., dissenting: With all due deference to the majority of this Court, and to the Circuit Court of Appeals for the Second Circuit, I continue to believe that the transaction present in this case (and also the one present in the Brewster Shirt Corporation case) is one more analogous to the discount of accounts receivable than to securing, by way of collateral security or mortgage, accounts payable. Footnotes. This report was adopted during the incumbency of Judge Harlan.↩1. SEC. 711. EXCESS PROFITS NET INCOME.(a) Taxable Years Beginning After December 31, 1939. -- The excess profits net income for any taxable year beginning after December 31, 1939, shall be the normal-tax net income, as defined in section 13 (a) (2), for such year except that the following adjustments shall be made: * * (2) Excess profits credit computed under invested capital credit. -- If the excess profits credit is computed under section 714, the adjustments shall be as follows: * * (B) Interest. -- The deduction for interest shall be reduced by an amount equal to 50 per centum of so much of such interest as represents interest on the indebtedness included in the daily amounts of borrowed capital (determined under section 719 (a));SEC. 714. EXCESS PROFITS CREDIT -- BASED ON INVESTED CAPITAL.The excess profits credit, for any taxable year, computed under this section, shall be the amount shown in the following table:If the invested capital for the taxable year,determined under section 715 is: The credit shall be:Not over $ 5,000,0008% of the invested capital. * * SEC. 715. DEFINITION OF INVESTED CAPITAL.For the purposes of this subchapter the invested capital for any taxable year shall be the average invested capital for such year, determined under sction 716. * SEC. 716. AVERAGE INVESTED CAPITAL.The average invested capital for any taxable year shall be the aggregate of the daily invested capital for each day of such taxable year, divided by the number of days in such taxable year.SEC. 717. DAILY INVESTED CAPITAL.The daily invested capital for any day of the taxable year shall be the sum of the equity invested capital for such day plus the borrowed invested capital for such day determined under section 719.SEC. 719. BORROWED INVESTED CAPITAL.(a) Borrowed Capital. -- The borrowed capital for any day of any taxable year shall be determined as of the beginning of such day and shall be the sum of the following:(1) The amount of the outstanding indebtedness (not including interest) of the taxpayer which is evidenced by a bond, note, bill of exchange, debenture, certificate of indebtedness, mortgage, or deed of trust * . * * *(b) Borrowed Invested Capital. -- The borrowed invested capital for any day of any taxable year shall be determined as of the beginning of such day and shall be an amount equal to 50 per centum of the borrowed capital for such day.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620948/	DAISY M. WARD, PETITIONER, ET AL., 1v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ward v. CommissionerDocket Nos. 62644-62649.United States Board of Tax Appeals29 B.T.A. 1251; 1934 BTA LEXIS 1404; February 27, 1934, Promulgated 1404 1. In connection with a reorganization petitioners agreed to exchange common and preferred stocks of A corporation for amounts certain of common stock of B corporation, which further agreed to repurchase upon petitioners' demand, all of its stock exchanged for A preferred stock and a part of its stock exchanged for A common stock. Shortly after the contract was made petitioners have notice that repurchase would be demanded. Thereafter, the stocks were delivered in accordance with the contract and two days later corporation B made repurchases. Held, notwithstanding the result ultimately effected under the contract as agreed to and consummated, there were two transactions; first, an exchange of stock for stock on which gain is not recognized; and second, a sale of part of the stock so received. 2. Corporation A purchased its preferred stock from the estate of a deceased stockholder and distributed same to its common stockholders. Held, assuming, as petitioners contend, that the distribution was not a stock dividend, and that upon subsequent disposition of the stock so received the cost basis is the fair market value thereof when so distributed, in the absence of evidence1405 as to such value, no basis is allowed. Joseph N. Moonan, Esq., Ray G. Moonan, Esq., and Charles Bunn, Esq., for the petitioners. John D. Kiley, Esq., for the respondent. GOODRICH1251 OPINION. GOODRICH: In these proceedings, which were consolidated for hearing, petitioners assail the following deficiencies in income tax for 1929: Daisy M. Ward$107.35Chris M. Peterson346.57Earl W. Ward1,319.41Estate of R. P. Ward7,224.73Emerson C. Ward124.89Charles H. Watson4,314.60Broadly, the issue relates to the amount of taxable gain derived by petitioners upon the disposition of their stock of the Ward Dry Milk Co., a corporation of Waseca, Minnesota. The facts clearly appear in the various written exhibits in evidence and from short additional testimony. Since they are not in dispute, they need not be fully recited for the purposes of this report. 1252 All the petitioners (including R. P. Ward, deceased, whose estate is here represented by his executors) were stockholders of the Ward Co., which had outstanding 2,000 shares of common and 1,010 shares of its preferred stock. The common stock had1406 been issued for patents, or as dividends, and, as conceded by petitioners, had no cost basis. Of the preferred stock, 844 shares had been issued by the company for cash at par, which was $100 a share. The remaining 166 shares had been purchased for cash at par by the company from the estate of a deceased stockholder, Winship, and thereafter distributed pro rata to the common stockholders. Under date of June 1, 1929, the Ward stockholders agreed to exchange all their stock for 18,750 shares of the common stock of the Kraft-Phenix Cheese Corporation, on the basis of 16,225 shares of Kraft stock for the 2,000 shares of Ward common, and 2,525 shares of Kraft stock for the 1,010 shares of Ward preferred. The agreement also provided (and this is the arrangement which gives rise to the controversy) that the Kraft corporation, after it had delivered its stock, if so requested, would repurchase from the Ward stockholders the 2,525 shares of Kraft stock "delivered to said stockholders as consideration for the [Ward] preferred stock" and, in addition, 2,475 shares of the Kraft stock "issued and delivered to [Ward stockholders] as part of the consideration for the [Ward] common stock, 1407 " both repurchases to be made at $40 a share. Moreover, Kraft agreed to pay the Ward stockholders 6 percent interest on $200,000 (the repurchase price of the 5,000 shares) from June 1 until date of delivery of the Kraft stock, and to pay during the same period, 12 1/2 cents a month on the other 13,750 shares of Kraft stock to be delivered to the Ward stockholders. At that time, Kraft was under agreement not to purchase any new properties for cash without the approval of its bankers, although it was free to acquire properties for its stock. The agreement between Kraft and the Ward stockholders was carried out in all respects. About June 5 Emerson C. Ward, who represented the Ward stockholders in the transaction, notified Kraft that it would be required to repurchase 5,000 shares according to the contract. Kraft immediately, through a broker, sold that amount short on the Exchange. On June 27 the Kraft corporation delivered 18,750 shares of its stock to Emerson C. Ward, of which 5,000 shares were issued in his name and the balance issued in the names of the several Ward stockholders according to their interests, the certificates being in such amounts as they had requested. Two1408 days later, on June 29, Emerson C. Ward delivered to Kraft the certificates, endorsed by him, representing the 5,000 shares issued in his name, and then received from Kraft its check totaling $202,628.13, of which $2,628.13 represented 1253 the interest and payments provided by the contract. The 5,000 shares thus acquired from the Ward stockholders Kraft turned in to its broker to cover its short sales, realizing a substantial profit on that transaction. Of the funds received from Kraft, Emerson C. Ward distributed $101,000 to the Ward preferred stockholders; paid the expenses incident to the transaction, and distributed the balance of $89,382.78 pro rata to the Ward common stockholders. Concerning the tax liabilities of the Ward stockholders arising under that transaction, the parties are at variance on two points. First, petitioners contend that their deal with Kraft was an exchange of stock for stock (both corporations being parties to a reorganization), on which no gain or loss is recognized under section 112(b)(3) of the 1928 Act, 2 followed by a sale of some of the stock so received by them. As to this respondent, while conceding that a reorganization is involved, 1409 maintains that there was but one transaction, falling under paragraph (c)(1) 3 of the same section - an exchange of stock for stock and money, giving rise to recognizable gain, and on that basis he has determined the deficiencies. So it falls on us to decide whether the deal, as agreed to and consummated, was an exchange by the Ward stockholders of their stock for 13,750 shares of Kraft1410 stock plus $200,000 in cash, as respondent views it, or whether there were two separate transactions, as petitioners contend, first an exchange of stock for stock, and later a sale of 5,000 shares of the stock so received by the Ward stockholders. The parties agree that the exchange was effected in connection with a reorganization within the meaning of section 112. Since the record contains nothing to indicate that their conclusion is erroneous, we are satisfied to accept it and confine our inquiry to the specific issue presented. The second point of controversy concerns the cost basis of the Ward preferred stock. A cost of $84,400 is conceded, but petitioners contend that $16,600 should be added thereto, being the amount paid for Winship's stock which was bought by the company and distributed to the common stockholders, thus making the total cost basis $101,000. Respondent refused to allow the increased basis claimed, holding the cost to be $84,400. As petitioners concede that the common stock had no cost basis, they concede also that the entire amount 1254 received on sale of the Kraft stock exchanged therefor was profit, and they have so reported. 1411 On the first point we sustain petitioners, for we are convinced that, both in form and substance, the agreements and acts of the Ward stockholders and the Kraft corporation effected two separate transactions; first, an exchange of stock for stock upon which gain or loss is not to be recognized, and, second, a sale of part of the stock so received. True, as respondent argues, taken together the transactions had the effect of an exchange of stock for stock plus cash, but our decision must be based not upon the effect finally resulting, but upon what was done. ; ; ; ; . The contract plainly provided for an exchange of both preferred and common Ward stocks for amounts certain of Kraft stock. Those exchanges were made. It also provided that Kraft should repurchase 5,000 shares of its stock upon request of the Ward stockholders, who had an option in the matter and were not bound to sell. They did so demand, however, and Kraft repurchased, but after1412 the exchanges had been completed. The delivery of the stocks discharged the bilateral obligations of the contract; there is nothing in it binding the Ward stockholders to resell to Kraft, even after they had given notice to Kraft to be prepared to buy, and, conceivably, they might have changed their minds at any time and decided to keep all their Kraft stock or seek another market for any amount of it. We conclude that the transactions were separate and must be so treated. Petitioners' second contention we deny. They argue that the distribution to them of the preferred stock purchased from the Winship estate by the Ward Co. with a part of its surplus funds was not a true stock dividend, since the interests of the common stockholders were substantially changed by the acquisition of new preferential rights. Assuming, arguendo, that to be so - see ; ; - it does not follow, as petitioners urge, that the cost of the distributed preferred stock to the corporation should be added to the amount previously paid by the1413 individuals for their holdings of preferred stock. Assuming further, as petitioners would have us, that the distribution was taxable when made, then upon the subsequent disposition of the stock received thereby the cost basis would be its fair market value when distributed. ; affd., . As to what that value may have been we have no evidence, and on that matter we can make no assumption. Consequently, we must sustain respondent's denial of a cost basis for the preferred stock in excess of $84,400. *1255 In the view we take of the case it follows that the separate cost bases of the preferred and common Ward stocks carry over to the separate lost of Kraft stock received in exchange therefor, and are to be used in computing gain upon the subsequent sale of the latter. Reviewed by the Board. Judgment will be entered under Rule 50.Footnotes1. Proceedings of the following petitioners are consolidated herewith: Chris M. Peterson; Earl W. Ward; Daisy M. Ward and Emerson C. Ward, as Executors of the Last Will and Testament of R. P. Ward, Deceased; Emerson C. Ward; and Charles H. Watson. ↩2. (3) STOCK FOR STOCK ON REORGANIZATION. - No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. ↩3. (1) If an exchange would be within the provisions of subsection (b)(1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4620950/	Joe F. and Ann Gizzi, Petitioners v. Commissioner of Internal Revenue, RespondentGizzi v. CommissionerDocket No. 8854-72United States Tax Court65 T.C. 342; 1975 U.S. Tax Ct. LEXIS 40; November 4, 1975, Filed 40 Decision will be entered for the respondent. Petitioner deducted as business expenses his costs of certain entertainment, travel, business gifts, and club dues. He had maintained adequate records of these expenses, but his records were inadvertently thrown out. Held, the records were not lost due to a casualty beyond petitioner's control, and therefore he was not relieved of the substantiation requirements of sec. 274. Sec. 1.274-5(c)(5), Income Tax Regs.Held, further, even if the loss of the records had been due to a casualty beyond his control, petitioner did not reasonably reconstruct his claimed expenses, and is not entitled to the claimed deductions. Joe Gizzi, pro se.William W. Stuart, for the respondent. Hall, Judge. HALL 342 Respondent determined a $ 10,588.53 deficiency in petitioners' 1969 Federal income taxes.The issues in this case are whether petitioners are entitled to the claimed deductions for business gifts, club dues, and travel, entertainment, and advertising expenses.FINDINGS OF FACTSome of the facts have been stipulated and are so found.Petitioners Joe F. and Ann Gizzi, husband and wife, filed a joint income tax return for 1969. Petitioners resided in River 343 Forest, Ill., at the time they filed their petition. Ann Gizzi is a party only by virtue of having filed a joint Federal income tax return with her husband. Joe F. Gizzi will be referred to herein as petitioner.Petitioner followed several lines of work in 1969. He served as a commission agent for Acme Fast Freight Co. (Acme), a company which specialized in transporting freight between the Chicago area and the west coast. Petitioner's duties for Acme involved soliciting additional clients, and he received as compensation a percentage of the fees he generated. Acme42 did not reimburse petitioner for any expenses involved in soliciting customers. Petitioner also operated an air freight delivery business under the name of B & G Trucking Co. (B & G Trucking), during 1969. And, in October 1969, petitioner began operating a drive-in restaurant named Fiorie's Drive-In.To encourage business in both of his freight ventures, petitioner felt it necessary frequently to entertain current and potential customers. It was common in his branch of the freight industry to entertain clients and give them gifts. To improve relations with Acme customers, petitioner would host golf parties, which included dinner and drinks, at the Cog Hill Country Club. In 1969, he hosted at least three such events, inviting both current and potential clients. Petitioner frequently gave gifts, such as turkeys, hams, and clock radios, to both his Acme clients and his B & G clients.In 1969 petitioner also made five or six trips to California to entertain a Mr. Donald Soul, an employee of International Business Machines. Petitioner hoped that Mr. Soul would exert influence to direct freight business to him. Palm Springs was chosen as their meeting place because, according to43 petitioner, the opportunities "to have a good time, so to speak" were more abundant in Palm Springs than in Los Angeles.Petitioner's custom was to pay for his business entertainment expenses, gifts, and travel expenses in cash. He recorded these expenses by writing on a voucher the date, place, purpose, and amount spent. In the case of business entertainment expenses, he also recorded the persons entertained. For gifts he included a description of the gift and the name of the recipient. To prepare his tax return, petitioner separated his accumulated vouchers into the categories designated by his tax preparer. Petitioner kept no separate diary of expenses.344 Petitioner kept his accumulated vouchers in the storage area of his residence. Sometime after filing his 1969 return, petitioner began to experience marital problems and moved from his home. Subsequent to his moving and prior to respondent's audit, petitioner's records somehow disappeared from the storage area. Petitioner's son indicated that the records had been inadvertently thrown out.Petitioner in his 1969 income tax return claimed total business-related deductions for all three of his business ventures in44 the amount of $ 49,086.16. His Acme-related expenses totaled $ 40,262; his B & G Trucking expenses totaled $ 7,427.78; and his restaurant expenses totaled $ 1,396.38.Respondent disallowed $ 38,293.10 of petitioner's claimed deductions, consisting of $ 34,825.72 of Acme-related deductions and $ 3,467.38 of B & G Trucking deductions. 1OPINIONPetitioner contends he is entitled to deduct the various entertainment expenses, costs of business gifts, air travel, 45 and club dues in issue because they are ordinary and necessary business expenses within the meaning of section 162, 2 and, further, that he has met the substantiation and other requirements of section 274. Respondent asserts that petitioner did not comply with section 274, and we agree. Therefore we do not reach any issue under section 162.Section 274(d) provides that entertainment expenses, gifts, club dues, and travel costs are not allowable as deductions "unless the taxpayer substantiates by adequate records or by sufficient 345 evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, * * or use of the [club], or the date and description of the gift, (C) the business purpose of the gift or other item and, (D) the business relationship to the taxpayer of persons entertained, using the [club], or receiving the gift." 46 The Treasury regulations, in section 1.274-5(c)(2), provide that "adequate records" shall consist of a diary or account book or similar record in which the elements of the expenditures are recorded at or near the time of the expenditure. Petitioner maintained a voucher system adequately delineating the elements of the various entertainment, travel, and gift expenditures. 3 The vouchers, however, were inadvertently lost. The question therefore is whether, having originally maintained adequate records, he nevertheless fails to meet the substantiation requirements if he cannot produce them here.47 Under section 1.274-5(c)(5), Income Tax Regs., if the taxpayer can establish that (1) he at one time possessed adequate records and (2) that his present lack of records is due to fire, flood, or other casualty beyond his control, then he is free of the normal substantiation requirements. The taxpayer in such a situation must instead reasonably reconstruct his expenditures. These regulations closely follow the congressional reports which accompanied the 1962 congressional revisions to section 274. H. Rept. No. 1447, 87th Cong., 2d Sess. (1962), 3 C.B. 405">1962-3 C.B. 405, 427; S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 3 C.B. 707">1962-3 C.B. 707, 741.The facts before us do not support the claim that the records were lost due to a casualty beyond petitioner's control. Marital difficulties and their consequences, no matter how seemingly independent of petitioner's will, do not sufficiently resemble floods or fire to be considered a casualty. See William C. Silver, Jr., 31 T.C.M. (CCH) 402">31 T.C.M. 402, 41 P-H Memo. T.C. par. 72-102 (1972), in which the Court held, by implication, that loss of records while 346 48 moving from one residence to another was not a casualty beyond the taxpayer's control.Even if the Court were to view the loss of petitioner's records as a casualty, petitioner has failed to fulfill the additional requirement of reasonably reconstructing his records. See, e.g., Lewis M. Bryan, 43 P-H Memo. T.C. par. 74,266 (1974) (records lost while moving; no effort at reconstruction); Marie Seckel, 33 T.C.M. (CCH) 734">33 T.C.M. 734, 43 P-H Memo. T.C. par. 74,170 (1974) (records were burglarized; no effort at reconstruction); Marjorie E. Blackburn, 32 T.C.M. (CCH) 1194">32 T.C.M. 1194, 42 P-H Memo. T.C. par. 73,254 (1973) (records lost in flood; no effort at reconstruction).For example, petitioner did not provide any information concerning the cost of the country club parties, their dates, or the identities of the persons entertained. Petitioner was equally indefinite as to both his business gifts and his California journeys. Petitioner also failed to submit any evidence regarding his Traffic Club dues and expenses.Petitioner's witness, Mr. Joseph F. Candela, sales manager at Acme, was present at*49 some of the Cog Hill Country Club functions, but gave no testimony regarding the dates or cost of each function. He indicated the identities of only 3 of the alleged 75 customers attending these parties. He also failed to document the dates, places, recipients, and costs of gifts. The witness provided no details about the dates, amounts, or places involved in petitioner's California travel. The witness did not even mention the Traffic Club deduction. Petitioner simply has not met the reconstruction requirement.Decision will be entered for the respondent. Footnotes1. Respondent disallowed the following items:(a) Concerning petitioner's Acme-related work:Meals, lodging and other travel expenses$ 3,422.18Air travel2,936.40Traffic Club dues, dinners, and meetings3,600.42Entertainment14,305.55Advertising and promotions-sales aids9,874.17Prizes and giveaways687.0034,825.72(b) Concerning B & G Trucking:Advertising and promotion$ 3,467.38The record contains almost no information concerning the advertising and promotion deduction claimed by petitioner for both of his freight ventures.↩2. All section references are to the Internal Revenue Code of 1954, as in effect during the year in issue.↩3. The elements in the case of entertainment expenses are the amount, time, place, business purpose, and business relationship of the recipient. Sec. 1.274-5(b)(3), Income Tax Regs. For a gift, in addition to the five elements immediately above, the taxpayer must include a description of the gift. Sec. 1.274-5(b)(5), Income Tax Regs. Concerning travel expenditures, including lodging and meals incidental to such travel, the taxpayer must prove the four elements of amount, time, place, and business purpose. Sec. 1.274-5(b)(2), Income Tax Regs.↩	01-04-2023	11-21-2020

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